69 Arbitrage

Question 1

Arbitrage definition

Answer 1

For two assets that have the same future payoffs, regardless of future events, but different prices, buying the lower-priced asset and selling the higher-priced asset provides a riskless arbitrage profit.

Question 2

No-Arbitrage Forward Price

Answer 2

F0 = S0*(1+R)^T

Question 3

No arbitrage price with costs and benefits

Answer 3

F0 = (S0 - PV(Ben) + PV(Cost))*(1+R)^T