Understanding Arbitrage An Intuitive Approach to Financial Analysis

by Billingsley, Randall

• ISBN13: 9780137010028
• ISBN10: 0137010028
• Edition: 1st
• Format: Paperback
• Copyright: 2005-10-05
• Publisher: Ft Pr

Summary

Arbitrage is central both to corporate risk management and to a wide range of investment strategies. Thousands of financial executives, managers, and sophisticated investors want to understand it, but most books on arbitrage are far too abstract and technical to serve their needs. Billingsley addresses this untapped market with the first accessible and realistic guide to the concepts and modern practice of arbitrage. It relies on intuition, not advanced math: readers will find basic algebra sufficient to understand it and begin using its methods. The author starts with a lucid introduction to the fundamentals of arbitrage, including the Laws of One Price and One Expected Return. Using realistic examples, he shows how to identify assets and portfolios ripe for exploitation: mispriced commodities, securities, misvalued currencies; interest rate differences; and more. You'll learn how to establish relative prices between underlying stocks, puts, calls, and 'riskless' securities like Treasury bills - and how these techniques support derivatives pricing and hedging.

Author Biography

 

Randall S. Billingsley, Ph.D., CFA is a finance professor at Virginia Tech as well as a Chartered Financial Analyst charterholder and holder of the Certified Rate of Return Analyst (CRRA) designation. He consults worldwide, and was

formerly Vice President at the Association for Investment Management and Research (now the CFA Institute). An award-winning teacher at both the undergraduate and graduate levels, he has taught review courses for CFA® charter candidates throughout the U.S. and Europe. His equity valuation case study was assigned in AIMR's Level II of the CFA® Curriculum. Billingsley serves as an expert witness on valuation and investment-related litigation.

Table of Contents

Preface	p. xv
Arbitrage, Hedging, and the Law of One Price	p. 1
Why Is Arbitrage So Important?
The Law of One Price
The Nature and Significance of Arbitrage
Hedging and Risk Reduction: The Tool of Arbitrage
Mispricing, Convergence, and Arbitrage
Identifying Arbitrage Opportunities
Summary
Endnotes
Arbitrage in Action	p. 27
Simple Arbitrage of a Mispriced Commodity: Gold in New York City Versus Gold in Hong Kong
Exploiting Mispriced Equivalent Combinations of Assets
Arbitrage in the Context of the Capital Asset Pricing Model
Arbitrage Pricing Theory Perspective
Summary
Endnotes
Cost of Carry Pricing	p. 51
The Cost of Carry Model: Forward Versus Spot Prices
Cost of Carry and Interest Rate Arbitrage
Practical Limitations
Summary
Endnotes
International Arbitrage	p. 75
Exchange Rates and Inflation
Interest Rates and Inflation
Interest Rates and Exchange Rates
Triangular Currency Arbitrage
Summary
Endnotes
Put-Call Parity and Arbitrage	p. 103
The Put-Call Parity Relationship
Why Should Put-Call Parity Hold?
Using Put-Call Parity to Create Synthetic Securities
Using Put-Call Parity to Understand Basic Option/Stock Strategies
Summary
Endnotes
Option Pricing	p. 127
Basics of the Binomial Pricing Approach
One-Period Binomial Option Pricing Model
Two-Period Binomial Option Pricing Model
The Black-Scholes-Merton Option Pricing Model
Summary
Endnotes
Arbitrage and the (lr)Relevance of Capital Structure	p. 163
The Essence of the Theory of Capital Structure Valuation
Measuring the Effect of Financial Leverage
Arbitrage and the Irrelevance of Capital Structure
Options, Put-Call Parity, and Valuing the Firm
Summary
Endnotes
References and Further Reaing	p. 189
Index	p. 193
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