Billingsley_Index.qxd 9/6/05 1:34 PM Page 193 INDEX INDEX
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1 Billingsley_Index.qxd 9/6/05 1:34 PM Page 193 A absence of arbitrage, 4 absolute convergence process, 15 absolute PPP, absolute prices, 30 all-equity capital structure, 173 analogies, M&M model, APT (Arbitrage Pricing Theory), 4, 28, 37 one-factor model, two-factor model, arbitrageurs, 2 arbs, 2 Asian Tiger currency crisis, 130 assets mispriced combinations, prices convergence, fairness value, 4-5 Law of One Expected Return, 3 Law of One Price, 3, 5-8 structure, 3-5 riskless modifications, 8 B backward induction valuation technique, option pricing, bank of England, George Soros, Bernstein, Peter L., 1 beta, 35 binomial pricing approach (option pricing), determinants of option prices, one-period arbitrage-free call prices, exploitation of arbitrage opportunity, framework description, pricing options with backward induction technique, riskless portfolios, sample application,
2 Billingsley_Index.qxd 9/6/05 1:34 PM Page 194 two-period calculating call prices, framework description, 142 hedge ratios, , 150 portfolio rebalancing, BSM (Black-Scholes- Merton) option pricing model, 129, 156, 158 C call options, firm valuation (capital structure analysis), capital asset pricing model. See CAPM capital structure firm valuation call options, put options, put-call parity relationship, M&M model, 164, 185, 187 day-to-day analogies, irrelevance of capital structure, , measuring effect of financial leverage, 167, Proposition I, 164 Proposition II, 171 CAPM (capital asset pricing model), 4, 28, cash and carry arbitrage, ceiling, hedging, 11 CFC (Creative Financial Concepts, Inc.) arbitrage strategy, capital structure, CIRP (covered interest rate parity), combinations, mispriced, commodities, mispriced, convergence, absolute convergence process, 15 asset prices, correlation convergence process, 15 corporate leverage, 173 correlation convergence process, 15 cost of carry model cash and carry arbitrage, enforcing with arbitrage, foreword versus spot prices,
3 Billingsley_Index.qxd 9/6/05 1:34 PM Page 195 interest rate arbitrage, 61-62, designing strategy, example, identifying opportunities, 62 market imperfections, 70 predicting spot prices with forwards, rate of return, 54 reverse cash and carry arbitrage, 57-59, covered call strategy, putcall parity relationship, covered interest rate parity. See CIRP Creative Financial Concepts, Inc. (CFC) arbitrage strategy, 173, 175 capital structure, cross-rates, triangular currency arbitrage, currencies, identifying arbitrage opportunities across, D determinants of option prices, domestic Fisher relation, 81 dominance criterion, 22 E EAI (earnings after interest), 170 earnings per share (EPS), 168 EBI (earnings before interest), 168 economic incentives, Law of One Price, 7 England bank, George Soros, EPS (earnings per share), 168 ERM (Exchange Rate Mechanism), 99 European options option pricing binomial pricing approach, 129, , , BSM (Black-Scholes- Merton) option pricing model, 129, put-call parity relationship, 104, 107 Exchange Rate Mechanism (ERM), 99 exchange rates movement, nominal interest rates, 83 relative PPP, expected rate of return, CAPM,
4 Billingsley_Index.qxd 9/6/05 1:34 PM Page 196 expected results, hedging, 10 expected returns resting, 3 securities, 6 F financial leverage, capital structure decisions, 167, firm valuation (capital structure analysis) call options, put options, put-call parity relationship, floor, hedging, 11 forward prices versus spot prices, forwards predicting future spot prices, predicting spot prices with, futures index arbitrage, 3 positive payoffs, zero payoffs, arbitrage at, G general method, formation of synthetic portfolios, gold, mispriced commodities, Gould, Jay, 115 H hedge ratios, 136, , 150 hedging, 3 benefits, 11 ceiling, 11 definition, 9-10 expected results, 10 floor, 11 profits, effects of price on, rate of return, 14 hedging (option pricing), 128 hedging transactions, 9 Hong Kong, gold in, I-J implied repo rate, 55 incentives, economic, 7 index arbitrage, 3 initial public offering. See IPOs interest rate arbitrage, cost of carry model, 61-62, designing strategy, example, identifying opportunities, 62 interest rates, nominal, 83 international arbitrage absolute PPP, domestic Fisher relation, 81 exchange rates, 83 CIRP, UIRP,
5 Billingsley_Index.qxd 9/6/05 1:34 PM Page 197 interest rates, 83 CIRP, UIRP, international Fisher rate relation, Law of One Price, 76 relative PPP, triangular currency arbitrage, international Fisher rate relation, investments opportunities for arbitrage, negative upfront cost investments, portfolios versus individual investments, zero cost investments, portfolios compared to, self-financing, 8 IPOs (initial public offering), 32 irrelevance of capital structure capital structure arbitrage strategy, 172 CFC (Creative Financial Concepts, Inc.), misvalued capital structure, 175 reality of arbitrage, K-L Law of One Expected Return, 3, 36 Law of One Price, 3-7 international arbitrage, 76 relationship to arbitrage, 8 short sales, triangular currency arbitrage, leverage, 167, loans, long positions, 10 Long-Term Capital Management. See LTCM LTCM (Long-Term Capital Management), M M&M (Modigliani-Miller capital structure theory), 164, 187 day-to-day analogies, firm valuation call options, put options, put-call parity relationship, 182,
6 Billingsley_Index.qxd 9/6/05 1:34 PM Page 198 irrelevance of capital structure, 172 CFC (Creative Financial Concepts, Inc.), misvalued capital structure, 175 reality of arbitrage, measuring effect of financial leverage on capital structure, 167, Proposition I, 164 Proposition II, 171 market imperfections, 70 market implications, 22 market-neutral arbitrage, 130 Meriwether, John, 129 Merton, Robert, 129 mimicking portfolios, 112 mispriced combinations, exploiting, mispriced commodities, mispricing, misvalued capital structure, 175 models M&M model, , , option pricing BSM (Black-Scholes- Merton) option pricing model, one-factor model, one-period binomial option pricing, two-factor model, two-period binomial option pricing, Modigliani-Miller capital structure theory. See M&M movement, exchange rates, Mullins, David, 129 Myers, Stewart, 165 N negative costs, new riskless position, 8 New York City, gold in, no-arbitrage principle, 16 nominal interest rate, 83 O one-factor model (APT), one-period binomial option pricing model arbitrage-free call prices, exploitation of arbitrage opportunity, framework description,
7 Billingsley_Index.qxd 9/6/05 1:34 PM Page 199 pricing options with backward induction technique, riskless portfolios, sample application, opportunities for arbitrage, identifying across currencies, negative upfront cost investments, portfolios versus individual investments, 17, 20 zero cost investments, options, put-call parity relationship, 117 covered call strategy, 117, P pairs trading, 2 Palm, parity, 104, , European options, mimicking portfolios, 112 regulatory arbitrage, 115, 117 strategies, , synthetic portfolios, personal leverage, 173 pizza analogy, M&M model, 165 portfolio rebalancing, portfolios, 17, 20 poultry analogy, 165 PPP (purchasing power parity), 76 absolute, domestic Fisher relation, 81 relative, presence of arbitrage, 4 price, price/earnings (P/E), 4 prices absolute, 30 APT one-factor model, two-factor model, arbitrage-free, 22 assets convergence, fairness value, 4-5 Law of One Expected Return, 3 Law of One Price, 3-8 structure, 3, 5 cost of carry model cash and carry arbitrage, CIRP, enforcing with arbitrage, forward prices versus spot prices, interest rate arbitrage, market imperfections, 70 predicting spot prices with forwards,
8 Billingsley_Index.qxd 9/6/05 1:34 PM Page 200 rate of return, 54 reverse cash and carry arbitrage, 57-59, mispricing, option pricing, , binomial pricing approach, 129, , , BSM (Black-Scholes- Merton) option pricing model, 129, relativity, 30 spot, pricing, , binomial pricing approach, determinants of option prices, one-period, two-period, BSM (Black-Scholes- Merton) option pricing model, 129, protective put strategy, proceeds, short sales, 7 profits hedging, protecting, 10 riskless, 7 Proposition I (M&M model), 164 Proposition II (M&M model), 171 protective put strategy, purchasing power parity. See PPP put options, put-call parity relationship, 104, , European options, firm valuation (capital structure analysis), mimicking portfolios, 112 regulatory arbitrage, strategies, 107, 109, 111, , synthetic portfolios, 111, Q-R Quantum Fund, rate of return CAPM, cost of carry model, 54 hedging, 14 U.S. Treasury securities, 35 rebalancing portfolios, recombining price trees, 143 regulatory arbitrage, 2, Reinganum, Marc, 16 relative PPP, relativity,
9 Billingsley_Index.qxd 9/6/05 1:34 PM Page 201 resting expected returns, 3 return on assets (ROA), 170 return on equity (ROE), 170 reverse cash and carry arbitrage, 57-59, risk arbitrage, 2 risk-free rate, 7 risk-free rate (option pricing), 128 risk-neutral valuation approach (option pricing), 129 riskless modifications, 8 riskless portfolios, riskless profit, 7 riskless strategies, 109 risks hedging, 3, 9-13 risk-free rate, 7 ROA (return on assets), 170 ROE (return on equity), 170 Rubin, Robert E., 27 S S&P 500, S&P 500 Composite Index. See S&P 500 Sage, Russell, 115 sameness, 28 Scholes, Myron, 129 securities beta, expected returns, 6 mimicking portfolios, 112 synthetic portfolios, U.S. Treasury, 35 self-financing investments, 8 self-financing strategies, 108 short sales Law of One Price, proceeds, 7 Soros, George, spot prices predicting with forwards, versus forward prices, stocks beta, option pricing, pairs trading, 2 price/earnings (P/E), 4 put-call parity relationship, 117 covered call strategy, , 121 protective put strategy, risk arbitrage, 2 strategies, put-call parity relationship, , , structure, 3, 5 synthetic loans, synthetic portfolios, T tax arbitrage, 2 taxes, 2 201
10 Billingsley_Index.qxd 9/6/05 1:34 PM Page 202 theory of capital structure valuation, M&M model, , 185, 187 time travel, 16 trading, 2 transactions, hedging, 9 triangular currency arbitrage, two-factor model (APT), two-period binomial option pricing model calculating call prices, framework description, 142 hedge ratios, , 150 portfolio rebalancing, U-Z U.S. Treasury securities, 35 UIRP (uncovered interest rate parity), uncovered interest rate parity. See UIRP value additively property, 22 wealth, Law of One Price, 6 zero investments,
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