Arbitrage-Free Condition

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Arbitrage-Free Condition

A situation in which all relevant assets are priced appropriately and there is no way for one's gains to outpace market gains without taking on more risk. Assuming an arbitrage-free condition is important in financial models, thought its existence is mainly theoretical.
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A smart solution to this problem consists of using arbitrage-free conditions, a replication technique of asset payoffs that retains the core fundamentals of equilibrium models.