Define arbitrage process, Financial Management

Assignment Help:

Q. Define Arbitrage Process ?

The basic theory of the MM approach if we ignore the taxes is that the total value of a firm should be constant irrespective of the degree of leverage. In other words the fundamental preposition of the MM approach is that the capital structure decision is irrelevant. MM approach offers behavioural justification for the irrelevance of the capital structure decision and isn't content with merely stating the preposition. The justification slander in the arbitrage process.

Arbitrage process engages buying and selling of those securities whose prices are lower (undervalued securities) as well as selling those securities whose prices are higher (overvalued securities). Buying the undervalued securities will raise their demand and will result in raising their prices and the selling of overvalued securities will raise their supply thereby bringing down their prices. This will carry on till the equilibrium is restored. The arbitrage process guarantees that the securities of two identical firms cannot sell at different prices for long.


Related Discussions:- Define arbitrage process

Rationale for mergers, Rationale for Mergers Many of the motives behind...

Rationale for Mergers Many of the motives behind mergers of firms are discussed hereunder: Growth Growth is the most general and important motive for mergers. Merging f

Understand by the term government policy agenda, Question 1: Give an ac...

Question 1: Give an account of the role of governmental bodies and officials in the making of public policies. Question 2: What do you understand by the term "Governmen

Market segmentation of the term structure of interest rates, Define the mar...

Define the market segmentation of the term structure of interest rates. Market segmentation: And also the investors’ expectations regarding future interest rates and thei

Constructing the theoretical spot rate curve for treasuries, The following ...

The following treasury issues can be included for the construction of the curve: On-the-run treasury issues. On-the-run treasury issues and sele

What are financial markets, What are financial markets? Why do they exist? ...

What are financial markets? Why do they exist? Ans: Financial markets are in which financial securities are bought and sold.  They be present primarily to bring deficit economi

Cost-volume-profit analysis, Cost-Volume-Profit Analysis The Cost-Volum...

Cost-Volume-Profit Analysis The Cost-Volume-Profit (CVP) analysis provides answers to vital questions such as: At what sales volume would the firm break-even? How sensitive is

Financial and management accounting, the salaries paid in 2004 is rs 500000...

the salaries paid in 2004 is rs 500000 outstanding is rs 20000 salaries paid in advance for 2004 is rs 30000 what is the actual salary expenditure for 2004 which accounting princip

Define the meaning of overtrading, Define the meaning of Overtrading Wh...

Define the meaning of Overtrading When  a  company  is  trading  at  a  very  fast  pace,  it  would be  generating  sales  on  credit  with  speed, so have a large volume of t

Debt securities , lso from the auditor's report, they have reported that th...

lso from the auditor's report, they have reported that the company has used funds raised on short-term basis for long-term investment. The company has purchased certain fixed asses

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd