COMMERCE 2FA3 Chapter Notes - Chapter 4: Efficient-Market Hypothesis, Zero-Coupon Bond, Uncorrelated Random Variables
19 Jan 2018
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Chapter 4: arbitrage, efficiency and hedging reading notes. Arbitrage defined to be the act of attempting to profit from an inconsistency in relative prices. When no arbitrage opportunities exist, it is said that the law of one price holds. Efficiency for all securities, price and value are identical. Markets are efficient if no investor can consistently earn excess returns utilizing all relevant information. Hedging taking positions so as to protect value of an asset. Act of attempting to profit from an inconsistency in relative prices. If one knows the yield on a single-period coupon paying bond and the yield on a two-period coupon paying bond, You can work out a two-period discount bond price (interest rate) One can figure out what a call option should be worth. Provided one knows the value of the underlying stock, the risk-free rate, and has some information about the volatility of the stock. Intrinsic value is what a security should be worth.
