Investments15

Investments15 - Arbitrage Professor Pierre-Olivier Weill 1...

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1 Professor Pierre-Olivier Weill Arbitrage 2 Outline ± Arbitrage definitions ± Arbitrage pricing ± Arbitrage pricing with transactions costs ± Real-world arbitrage trading 3 Buy low / Sell high Same cash flow => Same price
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4 Arbitrage Definitions ± In finance theory an “arbitrage” is defined as: a zero-investment trading strategy that generates a sure profit 9 no initial investment 9 non-negative cash flows at all times 9 a positive cash flow at some times ± On Wall Street “arbitrage” also often means – a trading strategy that is expected to make a profit – This is also called a “statistical arbitrage” (stat. arb.) ± In this class: finance-theory tradition 5 Arbitrage Pricing ± Important insight in finance: – there cannot be arbitrage opportunities ¾ if there were, arbitrageurs would trade aggressively to exploit the arbitrage until it disappear – called the “ No-Arbitrage Condition ± Perhaps surprisingly, using the no-arbitrage condition alone we can: – compute restrictions on security prices – compute explicitly prices of derivatives. 6
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This note was uploaded on 02/04/2010 for the course ECON 106v taught by Professor Miyakawa during the Spring '08 term at UCLA.

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Investments15 - Arbitrage Professor Pierre-Olivier Weill 1...

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