Suppose that a stock share is traded on two markets, one with prices denominated in euros and the other one in dollars. Now imagine that we observe the following prices:

- The current exchange rate is \(1.34 \$ €\) (by which we mean that the price of one \(€\) is \(\$ 1.34\) )

- The stock share price is \(€ 50\) on the first market and \(\$ 68\) on the second market It is easy to see that these prices are not in line. If we take the first two as correct, the price of that stock share should be

\[€ 50 \quad 1.34 \frac{\$}{€}=\$ 67\]

We may buy the stock share on market 1 and sell it immediately on market 2 , with a risk-free profit of \(\$ 1\). If many players pursue the same strategy, the ensuing pressure on prices will push them back in line and eliminate the misalignment.