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Principle of no arbitrage

  • The fundamental principle underlying much of financial engineering is the principle of no arbitrage. This principle asserts that two securities that provide the same future cash flow and have the same level of risk must sell for the same price.

  • One of the fundamental concepts in the theory of option pricing is the absence of arbitrage opportunities, is called the no arbitrage principle. The no-arbitrage principle prescribes basic consistency conditions between prices.

No Arbitrage Principle

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