When does a pricing difference become arbitrage?

A pricing difference becomes arbitrage when two positions have the same future payoff but different current prices, allowing a trader to buy the cheaper position and sell the expensive one.

The payoff match is the key. If the two positions are merely similar, the trade may be relative value, hedging, or speculation, but not clean arbitrage. In CFA questions, look for language such as same expiration, same strike, same underlying, borrowing or lending at the risk-free rate, and future cash flows that offset.

After that, include financing. A price gap that disappears once cash flows are discounted or compounded is not an arbitrage opportunity.