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The definition of arbitrage can be broken down into categories such as: A static arbitrage is an arbitrage that does not require rebalancing of positions.For example static-arbitrage bounds on the Prices of Basket Options A dynamic arbitrage is an arbitrage that requires trading instruments in the future, generally contingent on market states. A ...


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A static arbitrage is an arbitrage that does not require any re-balancing of the portfolio. For example, the CME offers a mini euro future for 62,500 euros and a big euro future worth 125,000 euros. You could sell 1 big future and buy 2 mini futures and this would be a static arbitrage. Another example would be the forward price arbitrage. A dynamic ...


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One easy way to cross-check that is to compute option implied correlations. Those correlations are model free and only depend on the current day option prices and they are indeed stable. For a nice article on computing option implied correlations check Vilkov's website he has several articles discussing option implied correlations. ...


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First your equation for returns is false. Forgetting about the jump, it does not reduce to Gbm returns. The variance term from Ito's formula is missing. In the case of a jump, a similar term should appear. Secondly, the distribution is obviously not "what market things are the real probabilities": you chose to impose specific sizes for the jump, the market ...



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