easy · FRM Part 1 Valuation and Risk Models
According to the Law of One Price, if two portfolios produce identical cash flows in all future states of the world, they must have the same current price.
If they do not, what is the resulting opportunity?
- A speculative opportunity, where an investor simply bets on which of the two portfolios will perform better going forward.
- A diversification benefit, since the two portfolios likely exhibit a fairly low correlation with each other over the long term.
- A hedging opportunity, where a trader uses one of the identical-cash-flow portfolios to offset the market risk exposure of the other.
- An arbitrage opportunity, where an investor can buy the cheaper portfolio and sell the more expensive one for a riskless profit.
Sign up free to see the explanation and track your rank →
More FRM Part 1 Valuation and Risk Models practice
- What is the Expected Loss (EL)?
- If a loan has a Probability of Default (PD) of 2.0%, an Exposure at Default (EAD) of $1,00
- If market yields rise by 150 basis points (0.015), what is the estimated new price of the
- A stock trades at S_0 = $100. A European call struck at K = $100 expires in 1 year. If the
- If the manager scales the VaR to a 10-day horizon using the square-root-of-time rule, what
- An investor holds a $10 million portfolio of two assets. Asset A has a weight of 60% and a
- Using a simple 'credit-triangle' approximation, what is the fair annual CDS spread in basi
- If the exposure at default (EAD) is $1 million, what is the unexpected loss (UL) assuming