Chapter 7: Principles of Asset Valuation Objective Explain the principles of asset evaluation Copyright © Prentice Hall Inc. 2000. Author: Nick Bagley, bdellaSoft, Inc.

Chapter 7 Contents 1 The relationship between an asset’s value & price 2 Value maximization & financial decisions 3 The law of one price & arbitrage 4 Arbitrage & the law of one price 5 Interest rates & the law of one price 6 Exchange rates & triangular arbitrage 7 Valuation using comparables 8 Valuation Models 9 Accounting measures of value 10 How information is reflected in security prices 11 The efficient markets hypothesis

Triangular Arbitrage ¥100/$ or $0.01/¥ USA Japan UK $2/£ or £0.5/$

Triangular Arbitrage More generally RA/C = RA/B * RB/C RA/B = 1/RB/A

Triangular Arbitrage More specifically, in the example R£/¥ = R£/$ * R$/¥ = 0.5 * 0.01 = 0.005 R¥/£ = 1/R£/¥ = 1/0.005 = 200 The other two pair follow the same form

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