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Unformatted text preview: Arbitrage: Example Arbitrage: Example Since the Tnote and the two Tbills together give the same future cash flows, an arbitrage opportunity exists if the sum of the Tbill prices differs from the Tnote price . For example, suppose: Pricer .... , = $980,000 Price.moTbill = $9,500 Price, "Tbill = $970,000 Then you can profit by Selling the Tnote short and Buying both Tbills Suppose aTnote gives the follov.1ng cash flows: Date: Today I 6mo I Iyr I Cashflow: $10,000 51,000,000 Suppose Tbills exist that give the following cash flows: Date: Today 6mo Iyr I I I i Cashflow: $10,000 Date: Today 6mo Iyr I I , i Cashflow: $1,000,000 Arbitrage Pricing Theory Arbitrage Pricing Theory The APT posits one or more economic factors (not necessarily a single market factor like the CAPM) that drive security returnS and for which investors must therefore be compensated. But what are the factors? Factors must be A pervasive market.wide influence on expected stock returns (Finn specific events are not APT risk factors) Unpredictable.in their. outcome. Factors may include (but are not limited to): Unanticipated inflation Interest rate shock Unanticipated change in GNP Unanticipated changes in the default risk premium The critical property...
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.
 Fall '10
 Sapp
 Arbitrage

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