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To say a curve is arbitrage-free, you need to pick an arbitrage path; a series of trades which, when followed, yield a net profit without creating exposure. We neglect counterparty exposure here, since you are presumably using market-neutral rates. One arbitrage is to buy a swap from your curve, and sell at the market price. This is a test of your curve ...


Given the assumptions of the Black Scholes model (continuous hedging, stock is driven by one dimensional GBM with all parameters known) the stock drift does not matter: all information about the expected return on the option is already contained in the current stock price (which reflects investor's preferences with respect to the known stock volatility and ...

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