The simultaneous buying and selling of securities, currencies, or commodities in different markets in order to take advantage of differing prices for the same asset.
Questions tagged [arbitrage]
20 questions
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3 answers
Is scalping tickets harmful?
IMHO, scalping tickets is no different from legitimate arbitrage unless manipulative.
Iirc, arbitrage increases surplus and hindering scalping is setting a price ceiling which leads to deadweight loss or something like that.
So why do some states…
BCLC
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Are financial markets "unique" for each "currency pair", or are they simply "translated"?
This is something I've been long wondering about.
Let's say that I have statistics showing the daily closing Bitcoin price in USD since early 2009. Great. Now, if I wanted to get the daily closing Bitcoin price in SEK or EUR or whatever currency…
Izak
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7
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Pricing a European call option while absence of arbitrage is violated
Assume that we have a general one-period market model consisting of d+1 assets and N states.
Using a replicating portfolio $\phi$, determine $\Pi(0;X)$, the price of a European call option, with payoff $X$, on the asset $S_1^2$ with strike price $K…
BCLC
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Are no arbitrage models and equilibrium models equivalent?
This YouTube video from WHU (starting from 3:50) claims that no-arbitrage models (such as Black-Scholes and HJM) are equivalent to equilibrium models (such as CAPM or C-CAPM).
He uses the Euler equation and the stochastic discount factor (SDF) as…
Alex
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5
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2 answers
No arbitrage arguments on production machine in a neoclassical model
I am reading a paper (Manuelli & Seshadri 2014) that use a neoclassical model to model technology diffusion. I cannot understand the arbitrage condition that are used to calculate the rent price on the machine service used in the production…
Alalalalaki
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What's wrong with have a 'one second tick' on stock market trades, to prevent high frequency trading?
Part of how high frequency trading works, is by taking advantage of millisecond advantages over other traders in communicating with the stock exchange.
To gain these advantages, high frequency traders have moved their servers closer to the stock…
dwjohnston
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4
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Who is losing in an arbitrage?
When some entity takes advantage of an arbitrage opportunity, who is losing money? For example, when there are price differences across cryptocurrency exchanges and someone exploits an arbitrage opportunity, who is losing out?
A vaguer question:…
Sade Ifada
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Properties of Financial Markets in Real Life
When studying financial economics, three concepts appear everywhere
Equilibria (investors maximise utility, markets clear and aggregated demand equals aggregated supply)
Completeness (there are enough (linear independent) assets to match the number…
Alex
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4
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How does Egypt prevent people from arbitraging their currency?
Apparently Egypt uses a fixed exchange rate so there is a substantial difference between the government rate for the Egyptian pound and the price on the street. What prevents someone from just buying pounds on the street using dollars and then…
Lassie Fair
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$E[F_T] = F_0$ implies $p = \frac{1-d}{u-d}$? or is implied by?
From Ch 12 in Hull's OFOD, we compute the risk-neutral probabilities for a futures contract:
Later in Ch 17, futures options are valued, and we have the same result:
In relation to Chapter 16 and 17, my Derivatives Pricing prof gave us this…
BCLC
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2
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Fundamental Theorem of Asset Pricing (Linear Algebra)
I saw this question in a textbook that I was recently reading and don't really know how to aprpoach this problem.
Let $H$ be a finite dimensional vector space with inner product ($\cdotp$, $\cdotp$). Suppose $C\subset H$ is a closed convex cone…
Arthur L
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vote
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Arbitrage free implies complete market in general binomial model?
In Tomas Björk's Arbitrage Theory in Continuous Time, there exists this proposition
It seems that to show that the model is complete, we must show that the claims are reachable, i.e. we must find replicating portfolios for each claim.
Which part…
BCLC
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Need help with Wakker (2010) on arbitrage
In Prospect Theory (2010; Cambridge UP), Peter P. Wakker has an exercise assignment 3.3.6 without solution in the book and I'm really unsure about this one. The exercise states on pages 76-77:
Assignment 3.3.6. This assignment demonstrates that…
Eric '3ToedSloth'
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What happens when a subsidiary distributes its shares to its parent company?
After a subsidiary company spins off from its parent and becomes public, what happens when the subsidiary distributes its shares to the parent firm's shareholders at some later time?
What I'm reading seems to suggest that the price of the…
lithium123
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Microeconomic rationale for UIP (uncovered interest rate parity)
The key idea behind UIP is that as for all common financial instruments, the "law of no free lunch" should also hold for currencies. However it differs from traditional replication-based no-arbitrage conditions like CIP in that there is no obvious…
Steven
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