Arbitrage and parity

CFA Level II Economics
#1

Hi all,

Please help me on this

As per my understanding Arbitrage means riskless profit.

There are different parity which reach at different interconnected conclusion.

I am not able to understand how a condition of arbitage to be hold and not to be hold impact these parity?

Thanks

#2

Can you give an example of what you mean?

#3

Hi Bill,

Like for an eg in Kaplan there is a statement - no true arbitrage available to force relative PPP to hold.

I came across several time free flow of fund and arbitrage plays a role in FX market.

I am not able to connect story how an arbitrage to be hold and not to be hold going to make any difference to the conculsion made by these parities.

For eg : as per fisher international relation the % S = expected inflation differential between the two countries .

Lets assume if in this case arbitrage hold then till the time this relationship does not hold we have a chance of making arbitrage profit latter on coz of efficient market this relation has to be hold.

I hope I am able to explain what is gap in my understanding .

Thanks