What financial strategy involves buying and selling securities on different exchanges to capitalize on price differences?

• A. Market making
• B. Hedging
• C. Arbitrage
• D. Short selling

Answer: (C)

The financial strategy that involves buying and selling securities on different exchanges to capitalize on price differences is known as arbitrage. This practice is based on the principle that the same asset should have the same price across different markets. When discrepancies occur, traders can exploit these price differences to make a profit. For example, if a stock is priced lower on one exchange compared to another, a trader can purchase the stock on the less expensive exchange and simultaneously sell it on the more expensive one, thereby locking in a profit from the difference.

Arbitrage opportunities typically exist for only a short period, as the act of buying and selling swiftly tends to correct the price discrepancies. This strategy requires quick execution and often involves high volumes to be profitable, particularly after considering transaction costs.

Other strategies such as market making, hedging, and short selling focus on different aspects of trading and risk management, which do not primarily aim to exploit price differences across exchanges in the way arbitrage does. Market making involves providing liquidity by buying and selling securities to facilitate trades without necessarily capitalizing on price spreads. Hedging is designed to reduce risk exposure in a portfolio rather than seeking out price discrepancies, and short selling is a strategy used to profit from an anticipated decline in asset prices rather than