No-Arbitrage Condition

The no-arbitrage condition is a fundamental principle in finance stating that there should be no opportunity to make a risk-free profit with zero investment. If such an opportunity existed, traders would exploit it until prices adjust, eliminating the profit. This ensures markets are efficient and prices are fair, reflecting true value without guaranteed gains from discrepancies. In essence, it prevents the existence of free or riskless profit opportunities that could otherwise distort market behavior.