## Arbitrage Process
Arbitrage means buying an asset or security at a lower price in one market and simultaneously selling it at a higher price in another, profiting from the price difference. As investors do this, equilibrium is restored across markets.
### Role in MM theory
MM use arbitrage to prove that two identical firms — one levered (with debt) and one unlevered (no debt) — must have the same total value.
- If the levered (higher-valued) firm is overpriced, investors sell its shares and instead buy shares of the lower-valued firm.
- By doing so they can earn the same return at a lower outlay with the same (or lower) perceived risk — leaving them better off.
- This buying/selling pressure pushes the two firms' values back into equilibrium, confirming that capital structure cannot create value (in a no-tax world).
### Takeaway
Arbitrage is the behavioural mechanism that enforces MM Proposition 1 — value of levered firm = value of unlevered firm.