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

2. 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

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

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

5. 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

6. Past Feature Differential Old sale of this work
Recent well-matched sale
Recent sale of unrelated work
Feature Differential