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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
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...
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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.
- Spring '07