What is the result if no riskless arbitrage opportunities exist?
Explanation
Arbitrage forces prices to their fair value; the absence of arbitrage implies the Law of One Price holds.
Other questions
What is the primary definition of arbitrage as provided in the reading?
According to the Law of One Price, what must be true about two portfolios with identical future cash flows?
Which equation is used to illustrate the Law of One Price in the context of put-call parity?
In the equation S + P = B + C, what does the 'B + C' portfolio represent?
When does an arbitrage opportunity exist regarding the risk-free rate (RFR)?
What is the correct strategy if a portfolio's riskless return is less than the risk-free rate (RFR)?
What is the definition of 'Replication' in the context of derivatives?
What is the primary objective of using replication?
Which components are used to achieve replication?
Which of the following is categorized as a cost of owning an asset?
The opportunity cost of funds invested in an asset is considered a:
Which of the following is an example of a monetary benefit of owning an asset?
What is the non-monetary benefit of holding an asset referred to as?
Convenience yield is best described as:
According to the provided notes, the Net Cost of Carry (NCC) is calculated as:
If the Future Value of Ownership Benefits (B) is less than the Future Value of Ownership Costs (C), the Net Cost of Carry is:
If the Future Value of Ownership Benefits (B) equals the Future Value of Ownership Costs (C), the Net Cost of Carry is:
Under what condition is the Net Cost of Carry positive?
Which of the following is considered an insurance cost in the context of owning an underlying asset?
Interest payments on a bond are classified as what type of benefit?
Which portfolio is equivalent to a 'Protective Put'?
Which portfolio is equivalent to a 'Fiduciary Call'?
If the price of a Protective Put (S+P) is 105 and the price of a Fiduciary Call (B+C) is 100, what should an arbitrageur do?
Scenario: Ownership Benefits = 50, Ownership Costs = 40. According to the notes, what is the sign of the Net Cost of Carry?
Scenario: Ownership Benefits = 20, Ownership Costs = 30. What is the sign of the Net Cost of Carry?
Which strategy involves borrowing at the Risk-Free Rate (RFR)?
What does 'S' stand for in the arbitrage equation S + P = B + C?
Replication mirrors the derivative position when:
Which of the following best describes the 'method' of replication?
If a derivative is mispriced, what does replication allow an investor to do?
Why is convenience yield classified as non-monetary?
Dividend payments are to Stocks as ________ are to Bonds.
Which factor is NOT listed as a cost of owning an asset?
If Net Cost of Carry is Zero, what implies B = C?
What does the 'Sip Pepsi' mnemonic likely refer to in the arbitrage diagram?
What does the 'Be Cool' mnemonic refer to in the arbitrage diagram?
If Stock = 100, Put = 10, Bond = 90, Call = 15. Does arbitrage exist?
How does replication assist in pricing derivatives?
If B < C, the notes state the Net Cost of Carry is:
Riskless profit is synonymous with which term in this chapter?
In the context of 'Costs and Benefits', what does FV stand for?
If a stock pays no dividends and has no storage costs, and interest rates are positive, the cost of carry is driven by:
Which of the following would reduce the Net Cost of Carry (making it more negative) according to the notes' formula B - C?
S + P = 50. B + C = 48. What is the riskless profit per unit?
What does the 'Protective Put' strategy protect against?
If a replicating portfolio costs USD 100, what must the derivative price be to avoid arbitrage?
Why do arbitrage opportunities rarely persist in efficient markets?
A 'Fiduciary Call' consists of:
The phrase 'Law of One Price' is most closely associated with which concept?