CHE249H1 Lecture Notes - Lecture 5: Capital Asset Pricing Model, Market Rate, Arbitrage

• School: UTSG
• Department: Chemical Engineering and Applied Chemistry
• Course: CHE249H1
• Professor: Yuri Lawryshyn

Document Summary

Scenario (1): invest (cad) at cad risk-free rate = (cid:883) (cid:1857)(cid:2868). (cid:2872)% end of the year f = (cid:2869). (cid:2868)(cid:2873)(cid:2873) 0. 85% (cid:883) (cid:1857)(cid:2868). (cid:2872)% = (cid:2869). (cid:2868)(cid:2873)(cid:2873) 0. 85% To avoid arbitrage both investment should have the same value: Scenario (2): invest . 02(usd) at usd risk-free rate and convert it to cad at the. The proposed bail-out package is going to cost the us government a lot of money and lead to higher inflation in the us, leading to a higher risk-free rate. This would have the effect of weakening the usd and thus the usd/cad fx rate would increase. Expected price 3 years from now = 35 *(cid:4666)(cid:883)+. (cid:882)(cid:885)(cid:886)(cid:884)(cid:4667)(cid:2871) = $ 38. 72. Exp div at the end of the year. = (cid:1830)(cid:1874) (cid:4666)(cid:883)+(cid:1829)(cid:4667)(cid:3041) (cid:3041)=(cid:2869) (cid:2869) (cid:4666)(cid:2869)+(cid:4667) 1 then: (cid:1830)(cid:1874) (cid:1830)(cid:1874) (cid:4666)(cid:883)+(cid:1829)(cid:4667)= (cid:1830)(cid:1874)(cid:1829) (cid:4666)(cid:883)+(cid:1829)(cid:4667) (cid:883) (cid:4666)(cid:883)+(cid:1829)(cid:4667)(cid:3041) (cid:883) (cid:3041)=(cid:2869) Div at year end stock price 1 year from now without. Div at year end stock price 2 years from now without.