The Arbitrage-Free Valuation Framework - Reading 33 Flashcards
1
Q
What is the basic principle that guides the arbitrage free valuation model
A
law of one price
2
Q
What are the two types of arbitrage opp.?
A
- value additivity
- dominance
3
Q
what is arbitrage opp. by value additivity
A
value <> than some of parts
4
Q
what is arbitrage opp. by dominance
A
p1<>p2 w/ 1=2
5
Q
how to calculate the arbitrage-free value of an option free, fixed rate coupon bond
A
using each cashflow corresponding rate
