Friday, September 30, 2016

What‘s the definition of static arbitrage?


Could someone give the strict definition of static arbitrage? I know what the arbitrage means but have no idea about the term "Static".


Thanks in advance!



Answer




A static arbitrage is an arbitrage that does not require any re-balancing of the portfolio. For example, the CME offers a mini euro future for 62,500 euros and a big euro future worth 125,000 euros. You could sell 1 big future and buy 2 mini futures and this would be a static arbitrage. Another example would be the forward price arbitrage.


A dynamic arbitrage is one in which you have to re-balance your portfolio. An example of this would be buying an under priced option in the perfect black-scholes world while continuously delta hedging.


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