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Arbitrage
Arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more marketsstriking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which the unit is traded. Arbitrage has the effect of causing prices of the same or very similar assets in different markets to converge. When used by academics in economics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the possibility to instantaneously buy something for a low price and sell it for a higher price. In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may refer to ''expected'' profit, though losses may occur, and in practic ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Rational Pricing
Rational pricing is the assumption in financial economics that asset prices – and hence asset pricing models – will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments. Arbitrage mechanics Arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets. Where this mismatch can be exploited (i.e. after transaction costs, storage costs, transport costs, dividends etc.) the arbitrageur can "lock in" a risk-free profit by purchasing and selling simultaneously in both markets. In general, arbitrage ensures that "the law of one price" will hold; arbitrage also equalises the prices of assets with identical cash flows, and sets the price of assets with known future cash flows. The law of one price The same asset must trade at the same ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Statistical Arbitrage
In finance, statistical arbitrage (often abbreviated as Stat Arb or StatArb) is a class of short-term financial trading strategies that employ Mean reversion (finance), mean reversion models involving broadly diversified portfolios of securities (hundreds to thousands) held for short periods of time (generally seconds to days). These strategies are supported by substantial mathematical, computational, and trading platforms. Trading strategy Broadly speaking, StatArb is actually any strategy that is bottom-up, Beta (finance), beta-neutral in approach and uses statistical/econometric techniques in order to provide signals for execution. Signals are often generated through a contrarian mean reversion principle but can also be designed using such factors as lead/lag effects, corporate activity, short-term momentum (finance), momentum, etc. This is usually referred to as a multi-factor approach to StatArb. Because of the large number of stocks involved, the high portfolio turnover and ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Merger Arbitrage
Risk arbitrage, also known as merger arbitrage, is an investment strategy that speculates on the successful completion of mergers and acquisitions. An investor that employs this strategy is known as an arbitrageur. Risk arbitrage is a type of event-driven investing in that it attempts to exploit pricing inefficiencies caused by a corporate event. Basics Mergers In a merger, one company, the acquirer, makes an offer to purchase the shares of another company, the target. As compensation, the target will receive cash at a specified price, the acquirer's stock at specified ratio, or a combination of the two. In a cash merger, the acquirer offers to purchase the shares of the target for a certain price in cash. The target's stock price will most likely increase when the acquirer makes the offer, but the stock price will remain below the offer value. In some cases, the target's stock price will increase to a level above the offer price. This would indicate that investors expect t ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Convergence Trade
Convergence trade is a trading strategy consisting of two positions: buying one asset forward—i.e., for delivery in future (going ''long'' the asset)—and selling a similar asset forward (going '' short'' the asset) for a higher price, in the expectation that by the time the assets must be delivered, the prices will have become closer to equal (will have converged), and thus one profits by the amount of convergence. Convergence trades are often referred to as arbitrage, though in careful use arbitrage only refers to trading in ''the same'' or ''identical'' assets or cash flows, rather than in ''similar'' assets. Examples On the run/off the run On-the-run bonds (the most recently issued) generally trade at a premium over otherwise similar bonds, because they are more liquid—there is a liquidity premium. Once a newer bond is issued, this liquidity premium will generally decrease or disappear. For example, the 30-year US treasury bond generally trades at a premium relati ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Derivative (finance)
In finance, a derivative is a contract between a buyer and a seller. The derivative can take various forms, depending on the transaction, but every derivative has the following four elements: # an item (the "underlier") that can or must be bought or sold, # a future act which must occur (such as a sale or purchase of the underlier), # a price at which the future transaction must take place, and # a future date by which the act (such as a purchase or sale) must take place. A derivative's value depends on the performance of the underlier, which can be a commodity (for example, corn or oil), a financial instrument (e.g. a stock or a bond), price index, a price index, a currency, or an interest rate. Derivatives can be used to insure against price movements (Hedge (finance)#Etymology, hedging), increase exposure to price movements for speculation, or get access to otherwise hard-to-trade assets or markets. Most derivatives are price guarantees. But some are based on an event or p ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Quantitative Finance
Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling in the financial field. In general, there exist two separate branches of finance that require advanced quantitative techniques: derivatives pricing on the one hand, and risk and portfolio management on the other. Mathematical finance overlaps heavily with the fields of computational finance and financial engineering. The latter focuses on applications and modeling, often with the help of stochastic asset models, while the former focuses, in addition to analysis, on building tools of implementation for the models. Also related is quantitative investing, which relies on statistical and numerical models (and lately machine learning) as opposed to traditional fundamental analysis when managing portfolios. French mathematician Louis Bachelier's doctoral thesis, defended in 1900, is considered the first scholarly work on math ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Law Of One Price
In economics, the law of one price (LOOP) states that in the absence of trade frictions (such as transport costs and tariffs), and under conditions of free competition and price flexibility (where no individual sellers or buyers have power to manipulate prices and prices can freely adjust), identical goods sold at different locations should be sold for the same price when prices are expressed in a common currency. This law is derived from the assumption of the inevitable elimination of all arbitrage. See . Overview The intuition behind the law of one price is based on the assumption that differences between prices are eliminated by market participants taking advantage of arbitrage opportunities. There are three pre-requisites underlying the law: *Absence of trade frictions *Free competition *Price flexibility. Examples In regular trade Assume different prices for a single identical good in two locations, no transport costs, and no economic barriers between the two locations. ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Short (finance)
In finance, being short in an asset means investing in such a way that the investor will profit if the market value of the asset falls. This is the opposite of the more common Long (finance), long Position (finance), position, where the investor will profit if the market value of the asset rises. An investor that sells an asset short is, as to that asset, a short seller. There are a number of ways of achieving a short position. The most basic is physical selling short or short-selling, by which the short seller Securities lending, borrows an asset (often a security (finance), security such as a share (finance), share of stock or a bond (finance), bond) and sells it. The short seller must later buy the same amount of the asset to return it to the lender. If the market price of the asset has fallen in the meantime, the short seller will have made a profit equal to the difference in price. Conversely, if the price has risen then the short seller will bear a loss. The short seller ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
No-arbitrage Assumption
In financial mathematics, no-arbitrage bounds are mathematical relationships specifying limits on financial portfolio prices. These price bounds are a specific example of good–deal bounds, and are in fact the greatest extremes for good–deal bounds. The most frequent nontrivial example of no-arbitrage bounds is put–call parity for option prices. In incomplete markets, the bounds are given by the subhedging and superhedging prices. The essence of no-arbitrage in mathematical finance is excluding the possibility of "making money out of nothing" in the financial market. This is necessary because the existence of persistent risk free arbitrage Arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more marketsstriking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which th ... opportunities is not only unrealistic, but also contradicts the possibility of an e ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
General Equilibrium
In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an overall general equilibrium. General equilibrium theory contrasts with the theory of ''partial'' equilibrium, which analyzes a specific part of an economy while its other factors are held constant. General equilibrium theory both studies economies using the model of equilibrium pricing and seeks to determine in which circumstances the assumptions of general equilibrium will hold. The theory dates to the 1870s, particularly the work of French economist Léon Walras in his pioneering 1874 work ''Elements of Pure Economics''. The theory reached its modern form with the work of Lionel W. McKenzie (Walrasian theory), Kenneth Arrow and Gérard Debreu (Hicksian theory) in the 1950s. Overview Broadly speaking, general equilibrium tries to give a ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Price Discrimination
Price discrimination (differential pricing, equity pricing, preferential pricing, dual pricing, tiered pricing, and surveillance pricing) is a Microeconomics, microeconomic Pricing strategies, pricing strategy where identical or largely similar goods or services are sold at different Price, prices by the same provider to different buyers based on which Market segmentation, market segment they are perceived to be part of. Price discrimination is distinguished from product differentiation by the difference in production cost for the differently priced products involved in the latter strategy. Price discrimination essentially relies on the variation in customers' willingness to pay and in the Demand elasticity, elasticity of their demand. For price discrimination to succeed, a seller must have market power, such as a dominant market share, product uniqueness, sole pricing power, etc. Some prices under price discrimination may be lower than the price charged by a single-price monopoli ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Referee
A referee is an official, in a variety of sports and competition, responsible for enforcing the rules of the sport, including sportsmanship decisions such as ejection. The official tasked with this job may be known by a variety of other titles depending on the sport, including '' umpire'', ''judge'', '' arbiter'', '' commissaire'', or ''technical official'' (by the International Olympic Committee). Referees may be assisted by '' linesmen'', '' timekeepers'', '' touch judges'', or '' video assistant referees'' (VAR). Football (association) Originally team captains would consult each other in order to resolve any dispute on the pitch. Eventually this role was delegated to an ''umpire''. Each team would bring their own partisan umpire allowing the team captains to concentrate on the game. Later, the referee, a third "neutral" official was added; this ''referee'' would be "referred to" if the umpires could not resolve a dispute. The referee did not take his place on the pi ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
