no arbitrage condition

Here is the surprising part. In a properly working market, there is no such thing as free money sitting on the ground waiting to be picked up. If there ever is, someone picks it up so fast that it disappears almost the moment it appears. That vanishing act is the whole idea behind the no arbitrage condition.

Arbitrage simply means buying something cheap in one place and selling it dear in another, at the same time, with no risk in between. If dollars sell for ₦1,600 at one bureau de change and ₦1,650 at another two streets away, and you could buy and sell instantly with no cost, you would make ₦50 on every dollar for doing nothing but moving between two counters. The no arbitrage condition says this gap cannot last, because traders and arbitrageurs will rush in, buying where it is cheap and selling where it is dear, until the prices meet somewhere in the middle.

This is why a share of a Nigerian bank listed on the Nigerian Exchange should not trade at wildly different prices on two platforms at the same moment, and why the price of a government bond should line up with the interest you could otherwise earn holding cash. If it does not line up, sharp eyed traders close the gap before an ordinary investor even notices it existed.

In London, this same logic keeps the price of a FTSE futures contract tied closely to the actual value of the shares underneath it. If the futures price drifted too far from reality, traders would buy the cheaper side and sell the dearer side until they matched again.

For the diaspora reader sending money home, this is partly why sensible transfer apps rarely let their exchange rate stray far from the real market rate for long. Someone would exploit the gap, and competition drags the price back to where it belongs.