# Questions tagged [arbitrage]

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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### Combining two orderbooks

Consider two different pairs of currencies traded in the same exchange. We will call these pairs A/B and A/C. Each market comes ...
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### Can I replicate an option with time to expiry $t$ by trading in another with expiry $T > t$?

Suppose there's a salesman who will always sell me an option expiring in two weeks. His options trade at a steep discount, but I can't directly arb it because the closest exchange-traded contract ...
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### Are risk-free-rate bonds and cash fungible?

I had a thought experiment: suppose you wanted to borrow an equity security from me (perhaps to short sell it). I ask you for collateral and a borrow fee, and in exchange you get the stock. If you ...
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### Convergence of crypto perpetual futures

Perpetual contracts are supposed to track the spot prices through the funding mechanism. Typically, if the future has traded above the spot in the last averaging period used to compute the funding, ...
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### Does Put-Call parity have influence over American Option pricing in practice?

I am learning my options and from what I read it seems that put-call parity is regarded as only being applicable to European options because the time to exercise is known. American options, on the ...
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### Why is this inequality strict for arbitrage argument for European call?

in the notes about arbitrage arguments I am reading, I notice the statement We can also see that $$C^E_t>(S_t-K\mathrm{e}^{-r(T-t)})^+$$ Notice that the inequality holds STRICTLY! I don't ...
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### How to exactly calculate lag between 2 exchanges

Let's assume that there are two exchanges. One exchange is slow for various reasons.(for eg it is an open outcry versus electronic exchange) Even when there is no lag the prices will not match exactly ...
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I'd like to show that in diffusion models IV is bounded iff instantaneous vol is bounded if there is to be no arbitrage. So, assume a model under the pricing measure of the form $$dS_u = \sigma_u S_u ... • 5,077 1 vote 1 answer 228 views ### Triangular Arbitrage In FX Volatility If I know the price of GBPUSD and EURUSD, I can retrive the EURGBP price simple by EURGBP = \frac{GBPUSD}{EURUSD}. Is there something equivalent to FX Volatility? Knowing the \sigma_{GBPUSD},... 1 vote 0 answers 40 views ### Is it true that interest rates options with different maturities are free of calendar arbitrage because of the different underlying rates dynamics? The title says it all - is it true that European style interest rates options (lets say on LIBOR 3M for the sake of simplicity) with different maturities are free of calendar arbitrage because ... • 545 0 votes 0 answers 54 views ### Understanding arbitrage, defined as a series of cash flows I'm currently catching up on material presented in the edX-MIT course Foundations of Mondern Finance 1, in which they present a definition of arbitrage that doesn't quite make sense to me. Informally, ... • 101 0 votes 1 answer 212 views ### No-arbitrage conditions on a caps/floors volatility surface Suppose that one has a caps/floors volatility surface and wants to check whether this surface admits arbitrage. What is the theoretical and practical way to do it? Lets talk only about caps for ... • 545 0 votes 0 answers 51 views ### Rates arbitrage - practical trade example, is it actually risk free or can it burn? The trade: Imagine a bank balance sheet as follows: One liability: GBP 100m deposit fixed term 6 month One asset: JPY 153m government bond maturing in 1 year (£100m equivalent, spot rate 153) ... • 507 0 votes 0 answers 77 views ### Simple hedging technique comparison question: forward market vs money market I am trying to do some self studying and came across this question. I am not sure how I would analyze these hedging strategies to figure out which is better. Could you give me any help on how I could ... • 105 0 votes 1 answer 54 views ### Simple cross-rate table question I am trying to self-study and came across this question, I am not sure how to answer this. I think I should transform all of the product's quoted prices to USD then compare them, is that correct? The ... • 105 0 votes 1 answer 98 views ### Simple three-pair triangulation question I have a question I came across whilst self-studying and I need to use cross-currency triangulation. I am not too sure how to apply the cross-rate formula, and was hoping someone could show me how to ... • 105 0 votes 1 answer 194 views ### Is it fair in an introductory stochastic calculus/derivatives pricing class to ask for the price when absence of arbitrage is violated? [closed] Re close votes: I believe this is a fair kind of opinion-based question because it's like those ethics questions in academia se or workplace se or because it's pedagogical. Context: I'm actually ... • 831 1 vote 1 answer 46 views ### How to price a set of cashflows from which the buyer can choose one? Lets consider an arbitrage free and complete Model.Let also focus the analysis on the discrete time setting.Assume you have a finite set of random Cashflows \mathcal{A}. That means all elements of ... • 151 2 votes 1 answer 195 views ### Should the Libor Market Model using spot measure as numeraire simulate an arbitrage free forward curve? I have been looking at the following resource: Reference Paper Using equation  for the discretized version of the forward libor rate: \tilde{L}^i_{T_{j+1}} = \tilde{L}^i_{T_{j}} exp[\sigma^i(\sum^... • 113 3 votes 0 answers 96 views ### Is this term structure model valid? (Modeling the Zerobonds directly) Let us define the dynamics of the discounted Zerobonds as$$ \tilde{P}(t,T) = \int \sigma(t,T) dW_t + \tilde{P}(0,T)$$Lets assume \sigma(t,T) is s.t. \tilde{P}(t,T)  is a martingale and positive (... • 151 2 votes 0 answers 42 views ### Equivalence of expectation condition for contingent claims attainable and contingent claims super replicable We have the following definitions for set of contingent claims attainable and contingent claims super replicable I want to prove the following result How do I show iii \implies  ii.I understand ... • 55 2 votes 1 answer 203 views ### No free Lunch and weak-star topology The no free lunch is stated as follows What is the significance of the weak-star topology here .Also as far as I understand the weak-star topology is defined on the dual of a Banach space.So what is ... • 165 2 votes 1 answer 213 views ### No free lunch with bounded and vanishing risk I am reading a book which states 'No free lunch with bounded risk as follows where \tilde{V}_t is the discounted value of the portfolio.Then it states the following theorem EMM is the equivalent ... • 165 0 votes 1 answer 158 views ### How do you hedge your inventory when doing arbitrage? Say I want to do arbitrage between Exchange A and Exchange B on USD/AAPL. This requires that I hold equal parts USD and AAPL. I don't want exposure to the movement in AAPL. How do I hedge my AAPL ... • 171 2 votes 0 answers 69 views ### Speculation with quanto option - how to see the realized correlation From this question, on vanilla option vol speculation, we can gain intuition on the impact of realized vol on the gamma, and consequently on the efficiency of the speculation trade. Asuming long ... • 805 5 votes 1 answer 301 views ### Show a model is complete but not free of arbitrage Let \mathcal{F}=\{\Omega, \emptyset\} be the trivial \sigma -algebra, and consider the deterministic financial market model with zero interest rates, S_{0} \equiv 1, and n=1 additional asset ... • 373 -1 votes 1 answer 289 views ### Question in convex arbitrage [closed] In convex arbitrage, we say that if the convexity of call(put) price as a function of the strike is violated, we can have arbitrage strategy. For instance,$$ C_{K_2}\geq \lambda C_{K_1}+(1-\lambda) ...
I am looking for model independent (or weak/reasonable assumption) bounds on price of a OTM vanilla put on strike $k1$, conditional on an observable price for a ATM call at some strike $k2$. I ...