The same logic applies more generally whenever

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Unformatted text preview: titive market, the price of gold at any point in time will be the same in London and New York. The same logic applies more generally whenever equivalent investment opportunities trade in two different competitive markets. If the prices in the two markets differ, investors will profit immediately by buying in the market where the price is cheap and selling in the market where it is expensive. In doing so, supply and An Old Joke There is an old joke that many finance professors enjoy telling their students. It goes like this: A finance professor and a student are walking down a street. The student notices a $100 bill lying on the pavement and leans down to pick it up. The finance professor immediately intervenes and says, “Don’t bother; there is no free lunch. If that were a real $100 bill lying there, somebody would already have picked it up!” This joke makes fun of the principle of no arbitrage in competitive markets. But have you ever actually found a 03_ch03_berk.indd 03_ch03_berk.indd 81 real $100 bill lying on the pavement? Herein lies the real lesson behind the...
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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.

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