Lecture notes
Financial Economics and Capital Markets Autumn Term Slides 21/22
- Institution
- The University Of York (UOY)
Financial Economics and Capital Markets Autumn Term Slides 21/22
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Financial Economics and Capital MarketsTopic 1: Arbitrage and Financial Decision Making
Prof Laura Coroneo
University of York
Academic year 2021/22
,Overview
Valuing Decisions
The Time Value of Money
Net Present Value Decision Rule
Arbitrage and the Law of One Price
No-Arbitrage and Security Prices
Price of Risk
,Overview
Valuing Decisions
The Time Value of Money
Net Present Value Decision Rule
Arbitrage and the Law of One Price
No-Arbitrage and Security Prices
Price of Risk
, Valuing Decisions
Valuation Principle
The benefits and costs of decisions should be evaluated using competitive
market prices and, when the value of the benefits exceeds the value of
the costs, the investment decision should be made.
I The value of the benefits exceeds the value of the costs when the
Net Value (NV) is positive
I Identify Costs and Benefits
I May need help from other areas (eg. Marketing, Economics,
Organizational Behavior, Strategy, Operations, etc.)
I Use Competitive Market Prices to Determine Cash Values
I Competitive Market: a market in which goods can be bought and
sold at the same price
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