Arbitrage

From WilmottWiki

An arbitrage is a portfolio of zero value today which is of positive value in the future with positive probability and of negative value in the future with zero probability.

This definition can be broken down into categories such as:

• A static arbitrage is an arbitrage that does not require rebalancing of positions.

• A dynamic arbitrage is an arbitrage that requires trading instruments in the future, generally contingent on market states.

• A statistical arbitrage is a likely profit as predicted by past statistics.

• Model-independent arbitrage does not depend on any mathematical model of financial instruments to work. An example of this would be a violation of Put-call parity.

• Model-dependent arbitrage does require a model. An example would be options mispriced because of incorrect volatility.