Arbitrage strategy

Details Arbitrage strategy Arbitrage strategy

2010-02-14

arxiv.org/abs/1002.2740v1

Economy

Quantitative Finance

General Finance

2 pages; a version of this paper will appear in the Encyclopaedia of Quantitative Finance, John Wiley and Sons Inc

Scientific paper

An arbitrage strategy allows a financial agent to make certain profit out of nothing, i.e., out of zero initial investment. This has to be disallowed on economic basis if the market is in equilibrium state, as opportunities for riskless profit would result in an instantaneous movement of prices of certain financial instruments. The principle of not allowing for arbitrage opportunities in financial markets has far-reaching consequences, most notably the option-pricing and hedging formulas in complete markets.

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