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TL;DR

A trading strategy that generates risk-free profit with no net investment. Formally, a portfolio with zero cost, non-negative payoff in all states, and strictly positive payoff in at least one state.

By Valenke Exam Prep Team·Last updated 2026-06-03

Arbitrage

A trading strategy that generates risk-free profit with no net investment. Formally, a portfolio with zero cost, non-negative payoff in all states, and strictly positive payoff in at least one state.

Why it matters for interviews

No-arbitrage is the foundational assumption of asset pricing theory. All derivative pricing relies on the absence of arbitrage. Understanding how to identify and exploit arbitrage opportunities is tested in quant interviews.

Definition and Mathematical Foundation

A trading strategy that generates risk-free profit with no net investment. Formally, a portfolio with zero cost, non-negative payoff in all states, and strictly positive payoff in at least one state.

Application in Quantitative Finance

No-arbitrage is the foundational assumption of asset pricing theory. All derivative pricing relies on the absence of arbitrage. Understanding how to identify and exploit arbitrage opportunities is tested in quant interviews.

Related Terms

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Frequently Asked Questions

What is the law of one price?▼
Two assets with identical future payoffs must have the same current price. If not, buy the cheaper and sell the more expensive for a riskless profit. This is the simplest form of no-arbitrage.
What is statistical arbitrage?▼
Unlike pure arbitrage, statistical arbitrage exploits statistical relationships (mean reversion, factor mispricings) that hold on average but not with certainty. It involves risk and requires large portfolios for diversification.
Does arbitrage exist in real markets?▼
True riskless arbitrage is rare and short-lived due to competition. Transaction costs, capital constraints, and execution risk limit arbitrage. 'Limits to arbitrage' explains why mispricings can persist.