Chapter 7: Principles of

Asset Valuation

Objective
Explain the principles of
asset evaluation

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Copyright © Prentice Hall Inc. 2000. Author: Nick Bagley, bdellaSoft, Inc.
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
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 Triangular Arbitrage
¥100/$ or $0.01/¥

USA Japan

UK

$2/£ or £0.5/$ £0.005/¥ or ¥200/£

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Triangular Arbitrage

• More generally
• RA/C = RA/B * RB/C
• RA/B = 1/RB/A

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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

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 Old sale of this work

Past

Recent well-matched sale

Recent sale of unrelated work

Feature Differential
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