Rational Pricing

Please note that the content of this book primarily consists of articles available from Wikipedia or other free sources online. Rational pricing is the assumption in financial economics that asset prices will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments. Arbitrage is the practice of taking advantage of a state of imbalance between two markets. Where this mismatch can be exploited the arbitrageur "locks in" a risk free profit without investing any of his own money.

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High Quality Content by WIKIPEDIA articles! Rational pricing is the assumption in financial economics that asset prices will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments. Arbitrage is the practice of taking advantage of a state of imbalance between two markets. Where this mismatch can be exploited the arbitrageur "locks in" a risk free profit without investing any of his own money.