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Definition of 'Arbitrage-Free Valuation'
1. The theoretical future price of a security or commodity based on the relationship between spot prices, interest rates, carrying costs, convenience yields, exchange rates, transportation costs, etc.
2. The theoretical spot price of a security or commodity based on the futures price interest rates, carrying costs, convenience yields, exchange rates, transportation costs, etc.
When the actual futures price does not equal the theoretical futures price, arbitrage profits may be made.
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