Consistency among trading desks (Q854281)

A bank having several trading desks is considered. Each trading desk uses its own model and trades a linear subspace of claims. If the bank is willing to trade all securities and the models are ``inconsistent'', then there would be arbitrage opportunities. This paper gives conditions under which the bank can be sure it does not permit arbitrage. More exactly, the notion of strong arbitrage is introduced and a simple condition under which there is no strong arbitrage and there exists a finitely additive representing measure, is provided. Then it is shown that, for example, there is ``inconsistency'' between Libor and swap market models. This is implied by the fact that there is no countably additive measure that represents both prices. At last, necessary and sufficient conditions for the existence of a countably additive (signed or positive) measure which represents both initial pricing operators (and hence their natural extension) are given.