A phenomenon of booking profits by an arbitrager in case of price disparity is mostly witnessed in the the financial markets. This article gives a brief review of different theories that propose the possibility of arbitrage opportunities. An attempt is made to empirically prove the existence of arbitrage with Box Spread Strategy.

Arbitrage is an opportunity which results from mispricing of similar stocks, options or futures with identical cash flows. Arbitrage opportunity occurs when an underlying asset is differently priced compared to its options or futures contract in the same exchange or there exists mispricing of the security (or securities with identical cash flows) between two different exchanges. Arbitrage can be defined as a phenomenon wherein an investor earns a risk-free profit by purchasing a stock in one market, and selling it in another market thus capitalizing on the price differential.

There are various theoretical concepts (based on certain conditions and assumptions) which rule out the possibility of existence of arbitrage opportunities. Efficient Market Hypothesis (EMH), an investment theory by Eugene Fama, asserts that all the information is always incorporated and reflected in the price of a security. The hypothesis assumes that securities markets are exceptionally efficient and mirrors all information in the prices of the securities and also in the movement of the market. As the markets have informational efficiency, it is impossible to outperform or beat the market. To elaborate further, there is an active competition among profit maximizers and a free flow of all information and thus the market price of the stock always reflects its true intrinsic value.

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