COMMERCE 2FA3 Chapter Notes - Chapter 4: Capital Asset Pricing Model, Regression Analysis, Statistical Significance

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 2FA3
• Professor: Richard Deaves

Document Summary

Arbitrage: the act of attempting to profit from an inconsistency in relative process. When no arbitrage opportunity exits, it is said that the law of one price holds. Relative prices: refer to the price of a whole relative to the price of its constituents. When looking at currency and opportunities for arbitrage one looks at going from currency x to currency z as one method, or employing a bridge currency and going from currency x, to currency y, and then the currency z. However the value of currency z regardless of your path should be near identical even with the inclusion of transaction costs. The process can be referred to as triangular arbitration. Law of one price: the belief that holds if arbitrage opportunities do not exist. Law of one price holds in foreign currency exchange markets. Limits of arbitrage: arbitrageurs run the risk of wrong prices becoming even more wrong in the short run.