Chapter 7: Principles of Asset Valuation Objective Explain the principles of asset evaluation Chapter Contents • The relationship between an asset’s value & price • Exchange rates & triangular arbitrage • Value maximization & financial decisions • Valuation using comparables • The law of one price & arbitrage • Valuation Models • Arbitrage & the law of one price • Interest rates & the law of one price • 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 $2/£ or £0.5/$ £0.005/¥ or ¥200/£ 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 Old sale of this work Past Recent well-matched sale Recent sale of unrelated work Feature Differential