An arbitrage opportunity is an opportunity to make a profit at no risk with
no capital invested.
Derivatives MCQ - Derivatives Section 1
When an arbitrage opportunity exists investors will trade quickly and
prices will adjust to eliminate the opportunity.
An arbitrage opportunity is more likely to be exploited when the price
the differential between assets is large or when large volume transactions can
be executed.
When the prices reflect law of one price, there is no arbitrage opportunity.
If two portfolios produce identical results but sell for different prices, an
arbitrageur can buy the portfolio with the lower price and sell the portfolio
with the higher price, generating a net inflow of funds at the start of the
holding period.
