BUSI 2223 Lecture Notes - Lecture 2: Opportunity Cost, Savings Account, Time Signature
23 Sep 2016
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Valuation principle: if your benefit is greater than tour cost, you add wealth to your shareholder. Common time period in order to compare cost and benefit. (present and future value) Let"s say there is two prices in the market. One, price a is ,330 and one price b is ,550. You can buy and sell at either one of these prices. As a buyer, you want to buy at the lowest price. Since you can buy and sell at either price, you sell at price b, and make a profit of (this profit is guaranteed riskless profit). Now, following the law of supply and demand, the demand for a will go up, causing the price to raise. The supply of b will go up from everyone selling. Since there is excess supply of b, the price will fall. This is the law of one price arbitrage. However, in a competitive market no arbitrage exists.
