First, lets talk about arbitrage. The defining example of arbitrage occurs when you buy an asset on one market and simultaneously sell it on another market at a higher price. By doing so, you earn a risk-less profit. You buy low and sell high, simultaneously, earning you some amount of profit essentially for free. Finding a $1 on the street is another example of arbitrage. You earn risk-less profits simply because you noticed that there was a dollar.

The No Arbitrage Principle has many variations, but the basic idea is that no arbitrage can be expected to be found in a real economy. The reason is pretty simple: if there was an opportunity for arbitrage, someone would notice, act as a market maker, and bring the two separate markets to equilibrium. They would buy from sellers on the cheap market and sell to buyers on the expensive market until the two markets had the same clearing prices.

This argument is the most important example of an arbitrage argument, since if we can show that a situation is equivalent to an asset selling on two markets at different prices, we can capture arbitrage, which is supposed to not exist.

The No Arbitrage Principle leads to that old joke about the economist who refuses to pick up a dollar, because somebody would have already picked it up.

Real life arbitrage does exist, but capturing it is a race. Once an opportunity for arbitrage is used up, all the relevant markets are brought to equilibrium, and there is no longer a mismatch in pricing to exploit

sJdQpqxocKaDmnsussyKbnuoohVjrlrehIpdxwcuxbbyjqeMaJCnzoUKlJAlTPWPeggficxbfEtnHlVibNTSWvpGJekqjNK2Jtn

The feedback you provide will help us show you more relevant content in the future.

How does future price zero arbitrage argument work?

What is No Arbitrage Argument and the difference between strong and weak in laymans term?

How does future price zero arbitrage argument work?

What is No Arbitrage Argument and the difference between strong and weak in laymans term?

How does future price zero arbitrage argument work?

What is No Arbitrage Argument and the difference between strong and weak in laymans term?