What does positive arbitrage represent in financial terms?

Positive arbitrage represents a situation where the returns on an investment exceed the cost of borrowing funds to finance that investment. In financial terms, this occurs when the yield from an investment is higher than the rate at which capital can be obtained, often through debt. This difference creates a profit margin known as the arbitrage spread.

When an entity engages in activities that produce positive arbitrage, it indicates that they are effectively leveraging their investments. For example, if an organization borrows funds at a low-interest rate and invests that capital in a project or asset that yields a higher return, the excess return signifies positive arbitrage. This strategy can enhance the overall financial performance of the entity by increasing returns on equity.

The other options involve scenarios where the returns do not exceed the costs or yield. Earning below the arbitrage yield signifies a negative spread, and maintaining equilibrium in market yield indicates a balanced scenario with no additional profit incurred. A loss of investment value points to a detrimental outcome rather than a profitable arbitrage situation. Thus, the emphasis on positive arbitrage aligns with the idea of making a favorable investment return above borrowing costs, which is financially beneficial.