Valuation of investments

Question 1

Fair value

Answer 1

• The amount for which an asset could be exchanged or a liability settled between knowledgable willing parties of arm’s length
• Indicative price from brokers
• Use recent known price and adjust In line with an appropriate index
• Use stochastic modelling to determine a market-consistent value

Question 2

Arbitrage value

Answer 2

A mean of obtaining a proxy market value and is calculated b replicating the investment with a combination of other investments and applying the condition that in an efficient market the values must be equal - For derivative valuation

Question 3

Callable bond

Answer 3

A bond that the borrower can choose to repay at any time

Question 4

Puttable bond

Answer 4

A bond that the issuer can demand repayment at any time

Question 5

Arbitrage

Answer 5

Simultaneously buying and selling two economically equivalent but differentially priced portfolios so as to make an instant and risk-free profit

Question 6

Principle of non-arbitrage

Answer 6

The value taken is the cost of closing out the contract by buying an equal but opposite option or future on current terms

Question 7

Expected return

Answer 7

The return that the investor expects to achieve on the asset, given the
- Price paid for the asset
- Price for which investor expects to sell the asset
- Expected income while the asset is held