Arbitrage free, is it dominance or value additivity
I haven’t been sure on how to differentiate between dominance or value additivity arbitrage. At first I thought it is as simple as just checking whether we need to (for example buy multiple bonds and see one/multiple bonds). I thought dominance would be the case only when two bonds have different prices. However, question 11 in the book in The Arbitrage-Free Valuation Framework has got me confused as they considered that arbitrage dominance as the discount rates are different. I mean discount rates will be always different even with value additivity.
What’s the way you use to check whether it is value additivity or dominance?
If you could check that question. It can also be value additivity by combining 2 bonds of A
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