Question $27$

$1$ points

In the context of financial markets, how does the Law of One Price facilitate the process of arbitrage?

By ensuring that securities with identical cash flows have different prices in different markets, giving traders an opportunity to profit from the discrepancies.

By prohibiting arbitrage opportunities, ensuring that no profit can be made through the exploitation of price differentials in markets.

By asserting that securities with identical cash flows must sell for the same price in all markets, any deviation allows traders to buy low and sell high, realizing a risk free profit.

By encouraging the use of derivative instruments to hedge against the risk of price differentials in the short term, thus indirectly eliminating arbitrage opportunities

Moving to another question will save this response.