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What Is Arbitrage? Explain Why Arbitrage Drives the Contract Price

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Essay

What is arbitrage? Explain why arbitrage drives the contract price of futures to the price of the underlying asset on the expiration date,for prices above and below the asset price.


Definitions:

Debt-Equity Ratio

The ratio demonstrating the proportionate role of debt and equity in a company's asset financing scheme.

Payout Ratio

The percentage of a company's earnings that is paid out to shareholders in the form of dividends.

Internal Growth Rate

The internal growth rate is a measure of an organization's ability to increase its sales and profit without issuing more stock or incurring new debt.

Full Capacity

A term referring to the maximum level of production or output that a facility can achieve under normal operating conditions.

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