FRM Financial Risk Manager Practice Test

In order for price discrepancies to remain once arbitrage opportunities have been exhausted, there must be market friction and institutional constraints on trading activities such as taxes or limits on holding. Market frictions are transaction costs and institutional constraints are regulations on trading. Price discrepancies cannot remain in a frictionless market when there are no transaction costs and no taxes and assets are perfectly divisible.

Key Takeaway: Always remember to factor in transaction costs and regulatory constraints in any business actions you take.