Arbitrage
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What would lead to Arbitrage to not be executed when there is mis-pricing ?
If the transaction costs exceeds the money you could make from mis-pricing
The Law of One Price
The same asset must sell for the same price everywhere. When this law is broken, it can lead to Arbitrage
Define Arbitrage
Earning a risk-free profit of MORE THAN the risk-free rate
T/F: The difference between current and forward exchange rates should be consistent with the difference between domestic and foreign Interest Rates
True
What happens when everyone starts to jump on the Arbitrage train
People will all start borrowing, leads to an increase in demand for funds, increasing IR's in US. Then everyone invests in other countries
