Arbitrage Intuition for Quant Interviews
Arbitrage intuition for quant interviews, covering idealized no-risk profit, toy mispricing, constraints, and positive-EV confusion.
Candidates preparing for trading and pricing discussions.
Idealized arbitrage
In interview theory, arbitrage usually means a set of trades with no initial net cost, no risk of loss, and some chance of profit.
Toy mispricing
If two identical toy payoffs have different prices and no friction, buying the cheaper and selling the richer creates an idealized arbitrage.
Concrete example
If one contract pays exactly 1 dollar tomorrow and costs 0.90 while another identical obligation can be sold for 0.95, the toy spread is a riskless 0.05 before frictions.
Positive EV is different
A positive expected value bet can still lose. Arbitrage, in the idealized sense, removes downside under the model.
Friction caveat
Real settings have fees, funding, latency, inventory, and execution risk. Do not claim a real arbitrage from a toy interview example.
Common mistakes
Candidates often call any favorable trade arbitrage. Reserve the word for the stronger no-loss structure unless the prompt defines it differently.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.