Pricing a derivative as the cost of a portfolio that replicates its payoff. Any other price would let someone lock in a risk-free gain.
Where you will meet it
No-arbitrage pricing comes up in 5 learning outcome notes across the FRM syllabus.
A few of them:
Foreign Exchange Markets FRM Part I · Financial markets and products
“Interest rate parity follows from no arbitrage.”
The Arbitrage Pricing Theory and Multifactor Models of Risk and Return FRM Part I · Foundations of risk management
“It also assumes enough assets exist for idiosyncratic risk to diversify away, and that no arbitrage persists.”
Arbitrage Pricing with Term Structure Models FRM Part II · Market risk measurement and management
“Because the probabilities come from market prices, they embed investors' attitude to risk, so the price is the same for any investor who accepts no arbitrage.”
Foreign Exchange Markets FRM Part I · Financial markets and products
“UIP depends on expectations and risk-neutral investors, with no arbitrage to enforce it, and it often fails empirically.”
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