The author references a padre who would purchase items sold for lesser amounts within one group of POWs and then re-sell it for a greater profit within another group of POWs. For example, buying coffee from the British at a small number of cigarettes and then selling it to the Russian prisoners for a much larger number of cigarettes. Generally, arbitrage should involve zero risk, because the two transactions should occur simultaneously, but this was not an option in the POW camps. According to Aswath Damodoran in Corporate Finance Theory and Practice, this form of arbitrage is classified as near arbitrage. Pure arbitrage requires that you invest no money, take no risk and walk away with sure profits. Unless the transactions can be completed simultaneously, such as with securities transfers, there is always risk. Damodoran defines near arbitrage taking advantage of as assets that have identical cash flows trading at different prices. The example that the author gives of Sam, the trader, might even be closer to speculative arbitrage if he took advantage of mispriced items by purchasing the items selling at below value and selling those going at a rate above their value.
4. What is the function of an entrepreneur in an economy?
The Federal Reserve Bank of Dallas describes the important roll that entrepreneurs play in a free market economy; they create competition and encourage economic growth. The author describes Sam as an entrepreneur. His mart encouraged trade within the camp, and it helped to regulate prices through competition. Once can imagine a situation where two prisoners engaged in an exchange of butter for cigarettes, and the buyer may say to the seller that his price is too high because he can...
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