ju-imicro-Ch11 - Chapter Eleven Asset)Markets Main Issue x...

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Chapter Eleven Asset ( 资资 )Markets
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Main Issue No Arbitrage( 资资 ) Condition
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Assets An asset is a commodity that provides a flow of services over time. E.g. a house, or a computer. A financial asset provides a flow of money over time -- a security.
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Assets Typically asset values are uncertain. Incorporating uncertainty is difficult at this stage so we will instead study assets assuming that we can see the future with perfect certainty.
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Arbitrage ( 套套 ) Arbitrage is trading for profit in commodities which are not used for consumption. E.g. buying and selling stocks, bonds, or stamps. No uncertainty all profit opportunities will be found. What does this imply for prices over time?
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Arbitrage The price today of an asset is p 0 . Its price tomorrow will be p 1 . Should it be sold now? The rate-of-return from holding the asset is I.e. R p p p = - 1 0 0 ( ) . 1 0 1 + = R p p
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Arbitrage Sell the asset now for $p 0 , put the money in the bank to earn interest at rate r and tomorrow you have ( ) . 1 0 + r p
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ju-imicro-Ch11 - Chapter Eleven Asset)Markets Main Issue x...

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