26: Arbitrage Free Framework

Question 1

Value Additivity arbitrage opportunity arises when:

Answer 1

the value of the whole
does not equal
the value of the parts

Question 2

Dominance arbitrage opportunities arise when:

Answer 2

one asset trades at lower price than another asset
w/ identical characteristics

Question 3

Arbitrage free valuation is an approach to security valuation that arrives at a price that is:

Answer 3

arbitrage free

Question 4

Arbitrage is riskless profit with:

Answer 4

zero investment

Question 5

Which valuation method is best for MBS?

Answer 5

Monte Carlo
since it provides the flexibility to change parameters