Economics Homework Help

The client has asked the firm to explain the concept of arbitrage as it relates to 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.

• 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 (attached), 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.