Free module · Arbitrage & prediction markets
Arbitrage: Payoffs, Financing and Execution
Prove the cash flows and test whether capital survives the path.
state payoffs · parity · carry · baskets · FX · capacity
The building blocks
An arbitrage claim is a cash-flow proof with financing and execution conditions. Begin by asking what pays in every state.
- List the contract payoffs and settlement dates.
- Price executable legs and every cash requirement.
- Stress missing states, failed legs and funding withdrawal.
Lessons in this module
- Start with every possible payoff
- Bid, ask and the gross-to-net waterfall
- Put–call parity from expiration states
- Dated cash-and-carry
- Triangular currency conversion
- ETF baskets and creation access
- Haircuts and survival capital
- Size, impact and the research decision
Practice and apply
- Start with every possible payoff — Complete set pays $1, costs $.96, simple annual funding .04, T=.5. Find terminal surplus.
- Bid, ask and the gross-to-net waterfall — 50 units, sale bid 100.35, purchase ask 100.10, variable .08/unit, fixed $5. Find net dollars.
- Put–call parity from expiration states — Spot $100, strike $102, call $6, r=.04, T=.5, no dividends. Find parity put.
- Dated cash-and-carry — Spot 100, future 104, r=.06, T=.5, cost .50/unit. Find surplus.
- Triangular currency conversion — Start $1000, rates .9 EUR/USD, 160 JPY/EUR, .007 USD/JPY, zero fees. Find surplus.
- ETF baskets and creation access — 20 ETF shares sold at $21; buy 10 shares at $20 and 5 at $40; balancing cash $10; costs $4. Find surplus.
- Haircuts and survival capital — Collateral $100000, haircut .18, margin reserve $12000, cash buffer $5000. Find required capital.
- Size, impact and the research decision — e=.20 USD/unit, λ=.001 USD/unit², q=100, F=$2. Find modeled net profit.
Work through the practice exercises · Quant development tools