The simultaneous purchase and sale of a financial security in order to profit from the difference in the security price during the trading activity.

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24 views

Arbitrage and completeness in multiperiod model?

Given a 2-period market with above stock price process along with a riskfree stock with a return of 5%, how do I determine whether the market is arbitrage-free and complete when I only have ...
4
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2answers
80 views

Two definitions of arbitrage in finite markets

I have read two definitions of the term an arbitrage opportunity in the literature*. Are they equivalent? Consider a single period market model over the measurable space $\Omega = \{\omega_1, \dots, ...
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2answers
90 views

Solving for r in the Black Scholes equation

Could you please correct which parts of my reasoning are wrong? Let's suppose that I know for sure that my estimate for a stock volatility is right (I have a crystal ball) and that it will be for ...
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1answer
74 views

What are the answers to these questions on card deck and option pricing?

here are 3 questions I have some trouble dealing with. Your help will be greatly appreciated! 1 - We have a deck card: 26 red, 26 black. we play a game: you draw a card from the deck without putting ...
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1answer
27 views

arbitrage proof question

prove the condition $D<R<U$ is equivalent to the absence of arbitrage: R = risk free investment rate of return. U and D are returns corresponding to the upward/downward price movements of a ...
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1answer
70 views

Arbitrage opportunity in discrete time

Say we have the following binary option $B$ on asset $S$ with strike K and expiration time T, assume also that the following relation holds at time $0$: $B > N*C(K,T)-N*C(K+1/N,T)$ Where $N$ is ...
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0answers
62 views

FX Statistical Arbitrage Strategy [closed]

I have had experience creating stat arb strategies for equities and etfs, but haven't dabbled much into FX trading. I was wondering if anyone knew any resources online they would suggest, or could ...
4
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1answer
79 views

Swaption Volatility Cube arbitrage

How can I exploit an arbitrage by violating the following no-arbitrage condition (taken from the paper "Arbitrage-Free Construction of the Swaption Cube" by Simon Johnson and Bereshad Nonas): ...
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2answers
89 views

What is the arbitrage opportunity in this simple one-period market?

I have a single period market, and three states, and I have 3 risky assets. I assume no interest. So I have three states $\Omega=\{\omega_1,\omega_2,\omega_3\}$. All assets start with the value 1, ...
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0answers
33 views

How do most arbitrage opportunities account for unknown volume at a ticker price?

So, from a conceptual level, arbitrage seems quite forward... buy at one place at one price, and sell somewhere at a higher price. However, after doing some initial digging it appears to be not quite ...
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1answer
143 views

Calendar Arbitrage in a Vol Surface

I am trying to determine the condition such that my implied vol surface doesn't have calendar arbitrage. I have done research and found that one such condition is that total variance should increase ...
1
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1answer
71 views

What is Toxic FX Flow debate!

So, basically i want to debate and find out the real reason behind being flag by ECNs and venues as "toxic". How to avoid being flag? What kind of strategies are toxic and why? Below is an article ...
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58 views

Higher moments arbitrage

Is there concrete evidence that statistical arbitrage (historical vs. implied) on higher moments, specifically skewness and kurtosis, can be (significantly) done? Working from this source, the author ...
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1answer
88 views

Prove arbitrage opportunity

The continuously compounded interest rate is $r$. The current price of the underlying asset is $S(0)$ and the forward price with delivery time in 1 year is $F(0,1)$. Short selling of the stock ...
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0answers
70 views

Latency Arbitrage in forex [closed]

(I've been downgraded on this question, and it's because most people don't understand what I mean. If you ever did hft arb, you will understand what I mean. If not, please do not answer) Everybody ...
2
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0answers
30 views

What is a standard model of convergence when looking at negative stub values?

I am trying to understand whether or not there is a standard model of convergence in the arbitrage scenario of negative stub models, i.e. when the market value of a company is valued less than its ...
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21 views

How to optimize an arbitrage portfolio when taking into account different speeds of mean reversion?

In portfolio optimization, it is insufficient to just note the size of price deviation - that only tells the amount of profit if held to maturity. One also needs to take into account reversion speed - ...
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31 views

Is this an arbitrage opportunity? [closed]

The 6 months risk free rate is $0.0809\%$ the 12 month rate is $0.1415%$ today. The forward rate for 6 months in 6 months is $0.0913\%$ Is there an arbitrage opportunity?
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18 views

Do you know any CFD broker with super cheap stock CFD that pays out dividends?

Do you think, it would be possible to buy stock prior its dividend date at some very cheap CFD broker, then wait 1 day, get dividend compensation credited and then sell the CFD back and end up in ...
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47 views

Market with exponentially distributed random variable

Consider a market consisting of a stock with $S_0^1=1$ and $\log(S_1^1)=Z$, where $Z$ is an exponentially distributed random variable. $S_0^1$ denoted the prices of the stock $1$ at time $t=0$ and ...
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1answer
49 views

method/technique for finding arbitrage

I was able to solve this problem and find the arbitrage but only after spending a long time on it and trying out different possibilites, is there a method or technique that can help me find the ...
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0answers
34 views

Are there alternatives to the Box-Tiao decomposition in identifying mean reverting portfolios?

As documented in this paper, Box-Tiao decomposition (a way to decompose multiple time series into components with different speeds of mean reversion) can be used to identify mean reverting portfolios. ...
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0answers
31 views

HJM model, existence of arbitrage:

The Setup: Suppose I know the yield curve of a Bond satisfies: f (0, t) = 0.04 for t ≥ 0 and f (ω, 1, t) = 0.06, t ≥ 1, ω = ω 1 , 0.02, t ≥ 1, ω = ω 2 , where Ω = {ω 1 , ω 2 } with P[ω i ] > 0, i = ...
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1answer
76 views

Does presence of arbitrage necessarily make all derivatives have zero value?

Spin-off from: Pricing when arbitrage is possible through Negative Probabilities or something else I mean in a theoretical sense: If we have a particular market model with some fancy assumptions such ...
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1answer
465 views

Arbitrage opportunity interview question

I have seen this interview question mentioned in a couple of places: There are three call options on the market, with the same expiry and with strikes 10, 20, and 30. Suppose the call option with ...
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2answers
239 views

Pricing when arbitrage is possible through Negative Probabilities or something else

Assume that we have a general one-period market model consisting of d+1 assets and N states. Using a replicating portfolio $\phi$, determine $\Pi(0;X)$, the price of a European call option, with ...
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0answers
23 views

Bond's bid-ask spread with no arbitrage assumption

Suppose I have a bond with unknown bid-ask spread, and a portfolio, containing it and also other bonds, all with known bid-ask spreads. How can the unknown spread be inferred? I assume there should ...
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0answers
97 views

Triangular Arbitrage with CFD

I cannot understand how the triangular arbitrage fits with CFD. Assuming there is an arbitrage opportunity: EUR/USD < USD/GBP * GBP/EUR If I do this strategy: 1 Long on EUR/USD at Ask price 1 ...
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75 views

Calculating PnL from log prices

I'm backtesting a statistical arbitrage strategy. To calculate the PnL I simply use $Y(t)-Y(t+n)$ for the profit on the first leg and $\beta*X(t) - \beta*X(t+n)$ for the profit on the second leg, ...
2
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0answers
29 views

Helpful references for fully understanding the mechanics of NASDAQ's auction system?

I've read about this before on their website directly and via this ITG paper. nasdaq site itg paper But I was wondering if there are any other good references I can supplement my understanding ...
2
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1answer
136 views

Finding Arbitrage in two Puts

A European Put Option on a non-dividend paying stock with strike price 80 is currently priced at 8 and a put option on the same stock with strike price 90 is priced at 9. Is there an arbitrage ...
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2answers
85 views

Portfolio Strategies Project

My first assignment for my Quantitative Finance Masters is to design a portfolio that theoretically makes money under any market movement. I am also asked to state all necessary assumptions. What ...
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48 views

Risks Associated with Option Arbitrage Portfolio

If my math is correct, if I construct the following portfolio of options the worst that I can do regardless of what the underlying does is profit $1.74 (less commissions). Is this correct? Are there ...
4
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1answer
169 views

Self-Frontrunning Arbitrage

If I have a large order to fill, shouldn't I always buy a derivative in the same direction to profit from the market impact? E.g. I sell 1 million shares and so I buy a put, which will hence almost ...
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2answers
295 views

What‘s the definition of static arbitrage?

Could someone give the strict definition of static arbitrage? I know what the arbitrage means but have no idea about the term "Static". Thanks in advance!
4
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1answer
61 views

market change, correlation and estimation bias

I hear many quants sating that markets change very slowly. This "fact" is even presented as a justification of statistical arbitrage, for example, by affirming that correlations remain roughly the ...
0
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1answer
378 views

Which distribution do I get?

Let's assume the stock moves according to a classic Black-Scholes model, and makes a proportional jump with an unknown proportion. Say, it is either +1% or -3% of the stock value, and we know for sure ...
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1answer
127 views

Capital gains and dividends tax arbitrage

There is a statement in Paul Wimott Introduce Quantitative Finance: Often capital gains due to the rise in a stock price are taxed differently from a dividend, which is often treated as income. ...
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2answers
297 views

Option arbitrage with dividends?

If a stock pays a discrete dividend, the stock price falls by the amount of the dividend. There is no arbitrage opportunity from this predictable jump, because the investors receive the same amount of ...
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2answers
299 views

How to check that an interest rate curve is arbitrage free

I have 2 interest rate curves (LIBOR 3M and OIS). I want to create stress scenarios for those two curves. Is it possible that some scenarios will make my term structure arbitrageable? How can I test ...
4
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2answers
362 views

Arbitrage question

Consider a hypothetical Payment in Kind (PIK) bond of XYZ Corporation. The bond has 2 years to maturity, a face value of $1000, and has an annual coupon rate of 10%. Coupons are paid annually. XYZ ...
2
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0answers
48 views

Show that in an arbitrage-free and non-redundant market a certain set is compact

Some notation: We consider a financial market with $d+1$ assets, the $0$-th asset is considered the risk-free asset, the others are the risky ones. The vector $\overline \pi \in \mathbb R^{d+1}$ ...
2
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1answer
95 views

Pricing digital options in discrete time

I am stuck in this exercise from my textbook: Consider a one-period market model with $N+1$ assets: a bond, a stock and $N-1$ call options. The prices of the bond are $B_0=1$ and $B_1 = 1+r$, ...
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3answers
254 views

References on Statistical Arbitrages

Is there any basic materials (books, papers) to read on Statistical Arbitrage? I certainly understand much of the useful information is in the industry. I just want to get some understanding on the ...
2
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1answer
342 views

Method for finding a arbitrage opportunity when market price of call is incorrect

The solution of the Black-scholes equation is the price of a European call. And the option price assumes the underlying stock is a geometric Brownian motion with volatility $\sigma_{1}>0$. ...
2
votes
1answer
91 views

Relationship between ADR in USD and original stock in GBP - Drift in price

For tax reasons, I switched a position I had in the HSBC London GBP listing into the USD ADR. The ADR represents 5 shares of the GBP listing. My understanding was that since at all times 1 ADR = 5 UK ...
0
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1answer
58 views

possible to estimate if hard-to-borrow?

I'm building a low frequency US equity stat arb system. On any given day the system is long ~100 stocks and short ~100 stocks. It trades once a day at the open, and on average 4/5 of the portfolio ...
2
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1answer
78 views

Where can one find realistic historical transaction costs?

I am interested in strategy simulation at different frequencies (high frequency and daily frequency) and I want to compute the optimal frequency of execution. To do this, I need to obtain realistic ...
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1answer
177 views

Forward Curves and Par Yield Curves

I'm recently reading a research paper on the yield curve by Salomon brothers and in it it states that when the forward curve is above the par yield curve, it is seen as cheaper. If for example, the ...
3
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2answers
107 views

arbitrage opportunity in a two period model

I have a little problem evaluating an european call. I Suppose the following: in $$t=0 : S_0 = 10$$ $$t = 1 : S_1 = \{10,11\}~with ~p=0.5$$ riskless rate : $(1+r)=\beta=1.049$ Strike ...