Chapter 1. Arbitrage, Hedging, and the Law of One Price
...[Arbs] keep the markets honest. They bring perfection to imperfect markets as their hunger for free lunches prompts them to bid away the discrepancies that attract them to the lunch counter. In the process, they make certain that prices for the same assets in different markets will be identical.
—Peter L. Bernstein1
“Buy low, sell high.” “A fool and his money are soon parted.” “Greed is good.” All these adages illustrate the profit-oriented impulses of Wall Street traders, who stand ready to buy and sell. In pursuit of profits, undervalued assets are bought, and overvalued ones are sold. While risk is routinely borne in trading assets, most investors prefer to exploit mispriced assets ...
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