Asset Pricing in the Absence of Arbitrage

Asset pricing in the absence of arbitrage refers to determining the fair value of financial assets assuming there are no opportunities to make riskless profits through simultaneous buying and selling of related assets. When no arbitrage exists, prices must align so that no trader can profit risk-free from price differences. This principle ensures consistency across markets, meaning the price of a security reflects its expected future cash flows adjusted for risk. Essentially, it guarantees that market prices are fair and efficient, preventing exploitation of price discrepancies for guaranteed profits.