Glossary

American-Style Option An option that can be exercised at any time prior to expiration.

Arbitrage Simultaneous purchase and sale of the same or equivalent security on the same or different markets in order to profit from price discrepancies. Many authors mistakenly define arbitrage as buying in one market and selling in another to take advantage of a price disparity. However, more often than not, arbitrage trading occurs across equivalent financial instruments in the same market. For example, the simultaneous purchase of stock and an equivalent number of mispriced put options can often be used to structure an arbitrage prior to a dividend payment. This trade, properly executed, is riskless. Merger arbitrage involving the exchange of stock ...

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