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If there are no arbitrage opportunities there is no dominant hedge or long position. Why would there be an arbitrage opportunity if everything was priced correctly? There may be arbitrage opportunities even if there are no dominant hedges or long positions. Put-call parity doesn't depend on a badly priced long position it depends on a badly priced ...


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Please clarify rigorously what you mean by each term. It is not true that no dominance is a consequence of no arbitrage. Think of the put-call parity: $C-P=S-K$, assuming $r=0$ since it's inconsequential. If there is no short selling then we can have: $C-P \geq S-K$ without arbitrage but No Dominance would not hold. If you think very deeply about this, ...


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Okay, this is a bit of an involved question, but the intuition is as follows: As Ross (1976) truly conceived it, being risk-neutral means being indifferent between any gamble and its mean payoff. This is equivalent to linear Von-Neumann Morgenstern preferences over all wealth levels, not just positive ones. A classic experiment to distinguish between ...


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Let $X$ be endowed with the following partial order: $y \geq x $ means that $\Bbb P(y\geq x) = 1$. The AOA condition in your case states that the pricing law $p$ is strictly inctreasing with respect to $\geq$, whereas LOP says that $p$ is a linear function. Neither if the two implies another one in general. For example, if $X = \Bbb R$ then $p(x) = x^3$ is a ...


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See http://kalx.net/ftapd.pdf for a rigorous proof of the FTAP accessible at the masters level.


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Their definition of arbitrage is not what a trader would call arbitrage. See http://kalx.net/ftapd.pdf for the details.


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You need to replace Z by Brownian motion at time t. Also, the expectation should be conditional expectation with respect to the sigma-algebra at time t. See http://kalx.net/fms/fms.html for a more complete explanation.


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I do this question to death in Concepts and ... If (discounted price of) everything is a martingale then every trading strategy is a martingale. Therefore any self-financing portfolio of initial value zero and has expectation zero. Therefore there are no arbitrages (since these have positive expectation and initial value zero). So there is no arbitrage in ...


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put call parity implies no arbitrage , along with a expected value of stock price of $pe^{rt}$ . working out the integrals yields this outcome


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The fact that one claim has an arbitrage-free price, does not imply that the entire market (for all claims) is arbitrage-free. E.g. $C_T=0$ is always arbitrage-free.


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Mark Joshi has pretty much solved it. To add to it, you can see that from Feynamn Kac (see remarks in http://en.wikipedia.org/wiki/Feynman–Kac_formula ) it follows that $$ F(t,S,v) = B_t \mathbf{E}\left[ \frac{ \sqrt{ S_T } }{ B_T } \big \vert S_t = S, v_t = v \right], $$ where the expectation is taken with respect to a measure where $W$ and $Z$ are ...


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Show that the discounted expectation price of the new security is the same as the solution of the PDE. Once this is done all three assets have discounted price processes which are martingales so there can be no arbitrage.



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