Fundamental theorem of asset pricing
Necessary and sufficient conditions for a market to be arbitrage free and complete / From Wikipedia, the free encyclopedia
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The fundamental theorems of asset pricing (also: of arbitrage, of finance), in both financial economics and mathematical finance, provide necessary and sufficient conditions for a market to be arbitrage-free, and for a market to be complete. An arbitrage opportunity is a way of making money with no initial investment without any possibility of loss. [1] Though arbitrage opportunities do exist briefly in real life, it has been said that any sensible market model must avoid this type of profit.[2]: 5 The first theorem is important in that it ensures a fundamental property of market models. Completeness is a common property of market models (for instance the Black–Scholes model). A complete market is one in which every contingent claim can be replicated. Though this property is common in models, it is not always considered desirable or realistic.[2]: 30