Arbitrage is a process through which an investor can buy an asset or combination of assets at one price and concurrently sell at a higher price, thereby earning a profit without investing any money or being exposed to any risk.
In a well-functioning market, arbitrage opportunities should not exist. If they do exist, arbitrage activities would quickly eliminate the price differential. The no-arbitrage principle states that any rational price for a financial instrument must exclude arbitrage opportunities. This is the minimal requirement for a feasible or rational price for any financial instrument. There is no free money.
The role of arbitrage:
Hedgers vs. Speculators: two parties involved in the risk management process
Depending on their prior risk exposures, participants in the derivatives market can be classified into hedgers and speculators.
|myanmar: there is no free lunch|
|valeris: There is always free lunch - you just gotta look for it :)|
|omer123: A socialist will love to give out free lunches. :)|
|vadimmuchnik: except that same socialist will want to strangle you (or be invited for dinner) after the lunch giveaway :)|
|gracecfa: There is no free lunch even if you look for one...Someone ultimately has to pay, either directly or indirectly...Thank you very much...|
|rahuls2609: if you are not paying for it either directly or indirectly, it is free for you|
|johntan1979: omer123 must be talking about how the wealthiest 1% enrich themselves at the government's expense (and stick you with the bill)|
|cbracho54: lol.. great CFA curriculum discussion!!|
|ankurwa10: @rahuls2609 maybe this lunch is free for you. but in the context of the overall marketplace, the losers must be equal to the winners. Otherwise, no one would play. enjoy this free lunch while it lasts ;)|
|fobucina: Guys, the most important thing is that we are having fun and participating! Now let's all hold hands and have a picnic.|
|gomez1234: i do make my life as an arbitrage trader,, send me that fools claiming there is no free lunch :)|