Expected return of an arbitrage-free investment transaction

Assignment Help Business Economics

Reference no: EM131009607

Investment theory suggests that there is no such thing as a “free lunch”. Accordingly, in an efficient market, there is no free money lying around – i.e. an arbitrage-free market environment. What would be the expected return of an arbitrage-free investment transaction? Illustrate how an investor achieves an arbitrage-free transaction using a bond, call option and a put option.

Reference no: EM131009607

Questions Cloud

What is the equipments annual depreciation cost : Consider a facility that has a 30-year life, a replacement cost of $2 million, and an interest rate of 5%. Calculate the annualization factor. Show your work/ calculations using the formula. To implement the project, a new equipment is purchased at $..

Increase in demand on the price and quantity exchanged : Draw supply and demand curves. Show the impact of an increase in demand on the price and quantity exchanged in the market. Show the impact of a decrease in demand on the price and quantity exchanged in the market. Please use the US Bond Market as you..

Explain the economic usefulness of porters five forces model : Irene’s Dairy is deciding whether or not to enter the market for ice cream, currently monopolized by Mattie’s Ice-cream. If it enters the market, Mattie’s can either accommodate him and share his 10million in profits equally with Irene or fight him a..

Evaluating program that reduces greenhouse gas emissions : Suppose we are evaluating a program that reduces greenhouse gas emissions, and the marginal benefit of the program is larger than the marginal cost at the current time. How should we adjust this program to achieve a more optimal outcome with higher n..

Expected return of an arbitrage-free investment transaction : Investment theory suggests that there is no such thing as a “free lunch”. Accordingly, in an efficient market, there is no free money lying around – i.e. an arbitrage-free market environment. What would be the expected return of an arbitrage-free inv..

What would the nash equilibrium be in this game : Two street racers are playing a simultaneous game of chicken. They have to race towards each other and whoever swerves first is chicken and faces shame, a loss of 8, while the winner enjoys a gain of 3. If neither stop, they would crash into each oth..

What can you say about her economies of scope : Laura sells mushrooms and strawberries to tourists. If Laura spends the morning collecting only mushrooms, she picks 8 pints; if she spends the morning picking strawberries, she collects 6 pints. If she picks some of each, however, she can harvest mo..

Advocate the prevention of delinquency in youth : There are many programs currently in use today that advocate the prevention of delinquency in youth. In a 1-2 page paper identify at least two such prevention programs and describe the strategy each uses to further the cause of preventing these crimi..

Calculate the equilibrium price and the equilibrium quantity : The following two equations express the relationship between price and quantity. Calculate the equilibrium price and the equilibrium quantity? Show your math. At what price is there a shortage of 5 units? Show your math.

User Account

All Pages