A strategy that makes a riskless profit with no net investment. Pricing relationships are derived on the basis that it cannot persist.
Where you will meet it
Arbitrage comes up in 37 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“A bank could otherwise hide a mark-to-market loss by moving a position to the book carried at cost, or pick the book with the lower capital charge, which is regulatory arbitrage.”
The Arbitrage Pricing Theory and Multifactor Models of Risk and Return FRM Part I · Foundations of risk management
“The Arbitrage Pricing Theory starts from a different place.”
Pricing Conventions, Discounting, and Arbitrage FRM Part I · Valuation and risk models
“The argument is arbitrage.”
Structured Credit Risk FRM Part II · Credit risk measurement and management
“Arbitrage structures buy a pool of higher-yielding assets and fund it with tranches whose combined cost is lower.”
GARP does not endorse, promote, review, or warrant the accuracy of the products or services offered by Charta Learning, nor does it endorse any pass rates claimed by Charta Learning. Further, GARP is not responsible for any fees or costs paid by the user to Charta Learning. FRM® and GARP® are registered trademarks owned by the Global Association of Risk Professionals, Inc. The questions, explanations and study notes are written for this product and are not GARP curriculum material.