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Profit generating mechanism on prices

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Reference no: EM13925771

EQUITIES ARBITRAGE / TRADING STRATEGIES:

Arbitrage:

· Theoretically, when prices do not reflect fundamentals, arbitrage provides the mechanism by which any pricing discrepancies are quickly eliminated

· In practice, arbitrage refers to the profit generating mechanism on prices that temporarily deviate from the theoretical or perceived equilibrium relationship

Categories of Arbitrage:

· Pure arbitrage
· Near arbitrage
· Speculative arbitrage

Conditions for Arbitrage:

· The possibility of arbitrage can only occur when one of three conditions are met:

o The law of one price does not hold (i.e., the same asset does not trade at the same price on all markets)
o Two assets with identical cash flows do not trade at the same price

Reference no: EM13925771

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