Western Governors University (WGU) ACCT3650 D105 Intermediate Accounting III Practice Exam

Arbitrage in finance refers to the simultaneous sale and purchase of an asset in different markets to take advantage of price discrepancies. This practice allows traders to secure risk-free profit by exploiting differences in asset prices. For example, if an asset is priced lower on one exchange and higher on another, a trader can buy on the exchange with the lower price and sell on the one with the higher price at the same time. This ensures that the profit is locked in without any market risk involved.

The other options describe different financial activities but do not accurately define arbitrage. Purchasing high-risk investments does not capture the essence of taking advantage of pricing inefficiencies across markets. Evaluating future cash flows is a crucial part of investment analysis and valuation, but it does not align with the immediate buy-sell action inherent in arbitrage. Holding assets for long periods is a long-term investment strategy and also does not relate to the concept of simultaneously engaging in transactions for profit based on price differences.