Economics Homework Help. Arbitrage 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.
See the Summary vs. Analysis (Links to an external site.) resource for additional guidance.
Must be three to five double-spaced pages in length (not including references pages). Also please note that the paper should be 20% or less for originality score, includes an introduction paragraph which will state the purpose for the report and the recommendations for action should be stated. The paper should also include an executive summary which will include a concise summary of the business report. Essentially, this section should (a) restate the purpose of the report, (b) highlight the major points of the report, and (c) describe any results, conclusions, or recommendations from the report. The paper should also have titles for all the posts requested in the response and a conclusion. Lastly, please use at least 3 scholarly and or academically journal as resources along with the article attached.
I have also attached the yield paper from ‘Week 2″
