Lecture 11 –Trading Strategies and Algorithmic Trading
- The possibility of arbitrage can only occur when one of three conditions are met:
- The law of one price does not hold (i.e., the same asset does not trade at the same price on all markets)
- Two assets with identical cash flows do not trade at the same price
- An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate (or, the asset does not have negligible costs of storage; as such, for example, this condition holds for grain but not for securities).