7.5 Interest Rates and the Law of One Price If two organizations with similar creditworthiness issue bonds with similar terms,then their interest rates will be similar Take care to ensure that there are no subtle differences in the tax status of the bonds the value of collateral or backing of the bonds Example Suppose you have $10,000 in a bank account earning an interest rate of 3%per year.At the same time you have an unpaid balance on your credit card of S5,000 on which you are paying an interest rate of 17%per year.What is the arbitrage opportunity you face? THE COURSE OF FINANCE 2017 SPRING SJTU 16
7.5 Interest Rates and the Law of One Price If two organizations with similar creditworthiness issue bonds with similar terms, then their interest rates will be similar Take care to ensure that there are no subtle differences in the tax status of the bonds the value of collateral or backing of the bonds Example Suppose you have $10,000 in a bank account earning an interest rate of 3% per year. At the same time you have an unpaid balance on your credit card of $5,000 on which you are paying an interest rate of 17% per year. What is the arbitrage opportunity you face? THE COURSE OF FINANCE 2017 SPRING SJTU 16
7.6 Exchange Rates and Triangular Arbitrage The law of one price also applies to foreign exchange markets If three currencies are freely convertible in competitive markets,then it is enough know any two exchange rates to compute the third exchange rate THE COURSE OF FINANCE 2017 SPRING SJTU 17
7.6 Exchange Rates and Triangular Arbitrage The law of one price also applies to foreign exchange markets If three currencies are freely convertible in competitive markets, then it is enough know any two exchange rates to compute the third exchange rate THE COURSE OF FINANCE 2017 SPRING SJTU 17