Economics Homework Help
UA Arbitrage Concept Links with Fixed Income Securities Report
The client has asked the firm to explain the concept of arbitrage as it relates to the fixed-income securities. You must develop a report that explains the arbitrage-free valuation framework and analyzes the availability of arbitrage opportunities in the U.S. corporate bond market.
In the paper,
Explain the arbitrage-free valuation framework and the law of one price.
Illustrate a theoretical arbitrage opportunity for a corporate bond based on value additivity.
Using the spot rates you used in your Week 2 Yield Curve and Forecast Report, provide an analysis to the client on the arbitrage-free valuation of two bonds in the portfolio (use only non-convertible corporate bonds from the portfolio).
This should be presented as the sum of the present values of expected future values using the benchmark spot rates.
Compare the arbitrage-free valuation to the current market value of the two chosen bonds.
State your conclusion as to whether an arbitrage-free opportunity exists for these two bonds.
Briefly explain the valuation process to determine if bonds with embedded options are priced correctly, or if there is an arbitrage opportunity for this type of bond.
Include in your explanation how to use a binomial interest rate tree in the valuation process.
Research and review at least two articles about arbitrage opportunities in the U.S. corporate bond market.
Based on these articles,
Analyze the availability of arbitrage opportunities in the U.S. corporate bond market.
Summarize the opportunities and risks of seeking and implementing bond trades to execute an arbitrage opportunity.
