arbitrage - IEOR 4500 Arbitrage through Linear Programming...

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Unformatted text preview: IEOR 4500 Arbitrage through Linear Programming We are given: • Two securities: 1 and 2 , and three scenarios for tomorrow: 1, 2, 3 . • The prices we have for the securities are: today Scen. 1 Scen. 2 Scen. 3 1 10- 7 19- 9 2 8 6- 8 8 Is arbitrage possible? IEOR 4500 Lecture 2 – arbitrage through Linear Programming We are given: • Two securities: 1 and 2 , and three scenarios: 1, 2, 3 . Prices: today Scen. 1 Scen. 2 Scen. 3 1 10- 7 19- 9 2 8 6- 8 8 Is arbitrage possible? • We take a position today, we close it tomorrow • What is today’s value? • What is tomorrow’s value? IEOR 4500 Lecture 2 – arbitrage through Linear Programming We are given: • Two securities: 1 and 2 , and three scenarios: 1, 2, 3 . Prices: today Scen. 1 Scen. 2 Scen. 3 1 10- 7 19- 9 2 8 6- 8 8 Is arbitrage possible? • We take a position today, we close it tomorrow • What is today’s value? The sum of the position values, using today’s data! • What is tomorrow’s value? The sum of the position values, using tomorrow’s data! IEOR 4500 Lecture 2 – arbitrage through Linear Programming We are given: • Two securities: 1 and 2 , and three scenarios: 1, 2, 3 . Prices: today Scen. 1 Scen. 2 Scen. 3 1 10- 7 19- 9 2 8 6- 8 8 Is arbitrage possible? • We take a position today, we close it tomorrow • What is today’s value? The sum of the position values, using today’s data! • What is tomorrow’s value? The sum of the position values, using tomorrow’s data! • Arbitrage: < 0 today, and ≥ 0 tomorrow in every scenario IEOR 4500 Lecture 2 – arbitrage through Linear Programming We are given: • Two securities: 1 and 2 , and three scenarios: 1, 2, 3 . Prices: today Scen. 1 Scen. 2 Scen. 3 1 10- 7 19- 9 2 8 6- 8 8 Is arbitrage possible?...
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arbitrage - IEOR 4500 Arbitrage through Linear Programming...

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