Prices can deviate but not by more than the amount of

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: e. To summarize, when there are transactions costs, arbitrage keeps prices of equivalent goods and securities close to each other. Prices can deviate but not by more than the amount of the transactions costs. $5 Benefit: $1330 per ounce (sell gold in London) NPV: $1330 transactions costs Expenses such as broker commission and the bidask spread investors must pay in most markets in order to trade securities. Concept Check 03_ch03_berk.indd 03_ch03_berk.indd 83 $1326 $5 $1 per ounce In the rest of the text, we will explore the details of implementing the Law of One Price to value securities. Specifically, we will determine the cash flows associated with stocks, bonds, and other securities, and learn how to compute the present value of these cash flows by taking into account their timing and risk. 11. If the Law of One Price were violated, how could investors profit? 12. What implication does the Law of One Price have for the price of a financial security? 12/15/11 8:08 PM 84 Part 2 Interest Rates and Valuing Cash Flows MyFinanceLab Here is what you should know after...
View Full Document

This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.

Ask a homework question - tutors are online