© Dr. Karl Knezourek Consulting & Training OG office@knezourek.

com

3. Arbitrage and the Law of One

Price

3.1. Arbitrage

3.2. Law of One Price

3.3. Security Prices

Slide 1
© Dr. Karl Knezourek Consulting & Training OG office@knezourek.com

3.1. Arbitrage
 Arbitrage is the practise of trading equivalent
goods in different markets simultaneously to
take advantage of price differences
 Arbitrage allows the investor to make a profit
without taking any risk
 Arbitrage opportunities will be exploited and
hence disappear quickly

Slide 2
© Dr. Karl Knezourek Consulting & Training OG office@knezourek.com

3.2. Law of One Price

 If equivalent investment opportunities trade
simultaneously in different competitive
markets, then they must trade for the same
price in both markets

Slide 3
© Dr. Karl Knezourek Consulting & Training OG office@knezourek.com

3.3. Security Prices

 The (no-arbitrage) price of a security must
equal the present value of all cash flows paid
by the security

Price = PV of all CFs

Slide 4