What is the 'No-Arbitrage' principle?

What is the 'No-Arbitrage' principle?

Approach: Explain the assumption that markets are efficient enough to eliminate risk-free profit.

The assumption that in a competitive market, prices are set such that no arbitrage opportunities exist. It is a fundamental building block for pricing derivatives.

Follow-up: Which famous formula relies on this principle? (Black-Scholes)

Key concepts: equilibrium, market efficiency.