Which of the following statements about arbitrage transaction is most likely to be correct?

A. The net inflow of funds occur at the end of the holding period.
B. It is more likely to occur when the price differential between assets is large and cost of short selling are high
C. It brings the prices to the levels that are consistent with the law of one price.

Correct Answer: C

The net inflow of the arbitrage transaction occur at the beginning of the period and it brings back the prices to the level that are consistent with the law of one price. The arbitrage transaction is more likely to occur when the price differential between the identical assets is high and the cost of short selling is low.