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What is the role of liquidity in enabling good derivatives markets?

April 26, 2017derivatives enabling good liquidity Markets

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What is the role of liquidity in enabling good derivatives markets?

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The role of liquidity (which is defined as low transactions costs) is in making arbitrage cheap and convenient. If transactions costs are low, then the smallest mispricings on the derivatives market will be removed by arbitrageurs, which will make the derivatives market more efficient.