Question
In: Finance
The law of one price states that securities that have the same cash flows must have...
The law of one price states that securities that have the same cash flows must have the same price, otherwise you could create an arbitrage opportunity. How is this used to demonstrate the put-call parity relationship?
Solutions
Expert Solution
The law of One price will be stating that securities that have same cash flows must have similar price across different dimension of this world because then it would not be leading into creation of an arbitrage opportunity and this is also used to demonstrate the put call parity relationship as put call parity will be advocating that all the put options and the all the call options across different categories and different countries of the world will be having a similar price of similar expiry and similar strike price as it mainly advocates that the European call option and the American call option and the American put option and the European put option of various Similar stocks having similar strike price and similar maturity will be having same price so it will be reaffirming the law of One price which advocates for having a similar price for similar cash flows and similar security.
Hence, the concepts and the fundamentals of the put call parity will be in synchronise with law of One price.
jeff jeffy answered 1 year agoRelated Solutions
The law of one price states that: The nominal exchange rates should always be the same...
The law of one price states that:
The nominal exchange rates should always be the same as the real
exchange rates, both in the short run and in the long run
In ideally efficient markets, the real purchasing power of a
currency should be the same regardless of where it is spent
The cost of an individual good should be higher in countries
with higher productivity
Which of the following scenarios illustrates why the law of one
price may not...
8.2 The Law of One Price implies that financial instruments with the same risk and the...
8.2 The Law of One Price implies that financial instruments with
the same risk and the same cash flows at the same time should have
the same price.
You are given the following table containing incomplete
information on four different bonds. Assume that all these bonds
have the same risk, and any coupon payments are paid annually.
Bond #
1
2
3
4
1 - year strip bond
2-year strip bond
2-year 6% coupon bond
2-year 7% coupon bond
Purchase...
8.2 The Law of One Price implies that financial instruments with the same risk and the...
8.2 The Law of One Price implies that financial instruments with
the same risk and the same cash flows at the same time should have
the same price.
You are given the following table containing incomplete
information on four different bonds. Assume that all these bonds
have the same risk, and any coupon payments are paid annually.
(20 marks total)
a. What is the yield to maturity on Bond #1?
b. What is the price of Bond #3?
c. You...
Are ‘law’ and ‘justice’ one and the same thing? Discuss.
Are ‘law’ and ‘justice’ one and the same thing? Discuss.
Consider two securities that pay risk-free cash flows over the next two years and that have...
Consider two securities that pay
risk-free cash flows over the next two years and that have the
current market prices shown here:
Security
Price Today ($)
Cash Flow in One Year ($)
Cash Flow in Two Years ($)
B1
94
100
0
B2
85
0
100
What is the no-arbitrage price of a security that pays cash
flows of $100 in one year and $100 in two
years?
What is the no-arbitrage price of a security that pays cash
flows...
Calculate the durations and volatilities of securities A, B, and C. Their cash flows are shown...
Calculate the durations and volatilities of securities A, B, and
C. Their cash flows are shown below. The interest rate is 8%.
(Do not round intermediate calculations. Round "Duration"
to 3 decimal places and "Volatility" to 2 decimal
places.)
Period 1
Period 2
Period 3
Duration
Volatility
A
40
40
40
years
B
20
20
120
years
C
10
10
110
years
Calculate the durations and volatilities of securities A, B, and C. Their cash flows are shown...
Calculate the durations and volatilities of securities A, B, and
C. Their cash flows are shown below. The interest rate is 10%.
(Do not round intermediate calculations. Round "Duration"
to 4 decimal places and "Volatility" to 2 decimal
places.)
Period 1
Period 2
Period 3
Duration
Volatility
A
50
50
60
years
B
30
30
140
years
C
20
20
130
years
Calculate the durations and volatilities of securities A, B, and C. Their cash flows are shown...
Calculate the durations and volatilities of securities A, B, and C.
Their cash flows are shown below. The interest rate is 9%.
Pd
1 Pd 2 Pd 3 Duration Volatility
A. 45 45 50 yrs
B. 25 25 130 yrs
C. 15 15 120 yrs
Calculate the durations and volatilities of securities A, B, and C. Their cash flows are shown...
Calculate the durations and volatilities of securities A, B, and
C. Their cash flows are shown below. The interest rate is 6%.
(Do not round intermediate calculations. Round "Duration"
to 4 decimal places and "Volatility" to 2 decimal
places.)
Period 1
Period 2
Period 3
Duration
Volatility
A
85
85
130
years
B
65
65
210
years
C
55
55
200
years
Calculate the durations and volatilities of securities A, B, and C. Their cash flows are shown...
Calculate the durations and volatilities of securities A, B, and
C. Their cash flows are shown below. The interest rate is 10%.
(Do not round intermediate calculations. Round "Duration"
to 4 decimal places and "Volatility" to 2 decimal
places.)
Period 1
Period 2
Period 3
Duration
Volatility
A
50
50
60
years
B
30
30
140
years
C
20
20
130
years
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- What is the difference among the principles of modularization, abstraction, encapsulation, and separation of interface and...
- An investment project costs $20,100 and has annual cash flows of $4,400 for six years. ...
- PUT IN JAVA PROGRAMMING The StockB class: Design a class named StockB that contains the following...
- Draw a DFA for the following ( ∑ = {0,1}): Set of all strings with.
- In the article from Forbes notes that the goal of a leader is not to clone...
- Many people keep time using a 24 hour clock (11 is 11am and 23 is 11pm,...
- UNIX ONLY -- DIFFICULT LAB ASSIGNMENT This is an extremely difficult subject for me. Could you...
ADVERTISEMENT