Understanding Arbitrage: An Intuitive Approach to Financial Analysis

Description

Arbitrage is central both to corporate risk management and to a wide range of investment strategies. Thousands of financial executives, managers, and sophisticated investors want to understand it, but most books on arbitrage are far too abstract and technical to serve their needs. Billingsley addresses this untapped market with the first accessible and realistic guide to the concepts and modern practice of arbitrage. It relies on intuition, not advanced math: readers will find basic algebra sufficient to understand it and begin using its methods. The author starts with a lucid introduction to the fundamentals of arbitrage, including the Laws of One Price and One Expected Return. Using realistic examples, he shows how to identify assets and portfolios ripe for exploitation: mispriced commodities, securities, misvalued currencies; interest rate differences; and more. You'll learn how to establish relative prices between underlying stock, puts, calls, and 'riskless' securities like Treasury bills -- and how these techniques support derivatives pricing and hedging. Billingsley then illuminates options pricing, the heart of modern risk management and financial engineering. He concludes with an accessible introduction to the Nobel-winning Modigliani-Miller theory, and its use in analyzing capital structure. Cover Contents Preface Chapter 1: Arbitrage, Hedging, and the Law of One Price Why Is Arbitrage So Important? The Law of One Price The Nature and Significance of Arbitrage Hedging and Risk Reduction: The Tool of Arbitrage Mispricing, Convergence, and Arbitrage Identifying Arbitrage Opportunities Summary Endnotes Chapter 2: Arbitrage in Action Simple Arbitrage of a Mispriced Commodity: Gold in New York City Versus Gold in Hong Kong Exploiting Mispriced Equivalent Combinations of Assets Arbitrage in the Context of the Capital Asset Pricing Model Arbitrage Pricing Theory Perspective Summary Endnotes Chapter 3: Cost of Carry Pricing The Cost of Carry Model: Forward Versus Spot Prices Cost of Carry and Interest Rate Arbitrage Practical Limitations Summary Endnotes Chapter 4: International Arbitrage Exchange Rates and Inflation Interest Rates and Inflation Interest Rates and Exchange Rates Triangular Currency Arbitrage Summary Endnotes Chapter 5: Put-Call Parity and Arbitrage The Put-Call Parity Relationship Why Should Put-Call Parity Hold? Using Put-Call Parity to Create Synthetic Securities Using Put-Call Parity to Understand Basic Option/Stock Strategies Summary Endnotes Chapter 6: Option Pricing Basics of the Binomial Pricing Approach One-Period Binomial Option Pricing Model Two-Period Binomial Option Pricing Model The Black-Scholes-Merton Option Pricing Model Summary Endnotes Chapter 7: Arbitrage and the (Ir)Relevance of Capital Structure The Essence of the Theory of Capital Structure Valuation Measuring the Effect of Financial Leverage Arbitrage and the Irrelevance of Capital Structure Options, Put-Call Parity, and Valuing the Firm Summary Endnotes References and Further Reading Index A B C D E F G H I-J K-L M N O P Q-R S T U-Z