Module 2.2 Implied returns & cash Flow Additivity Flashcards
(13 cards)
Equation for required rate of return.
Equation for implied growth rate.
Define no arbitrage principal
Law of one price- if two sets of future cash flows are identical, they will have same price today
List 3 examples of valuations based on no arbitrage principal.
- Forward interest rates
- Forward exchange rates
- Option pricing using binomial model
DDM can be converted to solve for what?
Required rate of return and implied growth rate
What is a forward interest rate?
Interest rate for a loan to be made at some future date.
What does the forward interest rate 2Y1Y mean?
Rate for 1 year loan to be made 2 years from now.
What is a spot interest rate?
Interest rate for a loan to be made today
What is an implied forward rates? Equation?
What are the two components of an exchange rate? USD/EUR
What does it mean
% difference between forward and spot rates is about difference between ________?
The two countries interest rates
Give equation for no arbitrage relation
The percentage difference between forward and spot exchange rates is approximately ________.
Equal to the difference between the interest rates in the two countries.
