EQUITIES ARBITRAGE / TRADING STRATEGIES:
Arbitrage:
· Theoretically, when prices do not reflect fundamentals, arbitrage provides the mechanism by which any pricing discrepancies are quickly eliminated
· In practice, arbitrage refers to the profit generating mechanism on prices that temporarily deviate from the theoretical or perceived equilibrium relationship
Categories of Arbitrage:
· Pure arbitrage
· Near arbitrage
· Speculative arbitrage
Conditions for Arbitrage:
· The possibility of arbitrage can only occur when one of three conditions are met:
o The law of one price does not hold (i.e., the same asset does not trade at the same price on all markets)
o Two assets with identical cash flows do not trade at the same price