Abstract This paper explains that the capital asset pricing model (CAPM) and the arbitrage pricing theory (APT) both depend on the identification and quantification of risk vis-a-vis a given financial device or product and thereby a financial product's volatility. The author points out that the primary assumption of the CAPM is that there exists a relationship between risk and the expected rate of return (ERR) and this relationship is then factored into the pricing structure of financial securities. The paper relates that APT is a model that relies on the integration of several factors at once rather than bundling all factors into a single beta. The paper concludes that the APT is the model of preference because the APT is the only valuation model, which can account for the full spectrum of market and asset-specific factors that can affect price and risk determination within the context of the global economy.
Table of Contents:
Overview
The Capital Asset Pricing Model
The Arbitrage Pricing Theory
From the Paper "There are several weaknesses with the CAPM, which has limited its effectiveness in the financial services industry. The most prominent of these weaknesses is that it is primarily a single-factor risk assessment method which relies on a single covariance to the overall financial market the security is traded in. This single covariance is the CAPM's beta which is effective in ideal market conditions but when extra-market factors affect change in the market or to the industry in which the security functions, this single-factor aspect becomes less accurate because it cannot accommodate such variance."
Tags: identification quantification risk, rate of return, integration
Abstract This paper explains how Arbitrage Pricing Theory and Capital Asset Pricing Model Theory work and then, in order to determine which theory seems to work better for an investor, the paper makes a comparison and analysis of the two theories.
From the Paper "Any Asset Pricing Theory forms the basic foundation of finance theory, in that it deals with the value of any asset under unknown or uncertain circumstances. The relationship between an asset and its price is the mainstay of the asset pricing theory: the lower the price, the poorer the expected performance. The Arbitrage Pricing Theory derives from this theory. The basic idea in the APT theory is that any sort of risk in asset returns must not affect the pricing of the asset in any way; it must depend on the covariance of assets with the risk factors. (Bayesian Approach of the Arbitrage Pricing Theory) The APT originated from Stephen Ross, 1976-1978. Ross had used a statistical procedure for assets returns, with the belief that there are in existence no arbitrage probabilities. The APT must of necessity involve a lot of risk taking processes, (Definition of Arbitrage Pricing Theory.)
A study of how the arbitrage pricing theory is typically used to model economic risk and market behaviors in general, with a view to how these applied to China and Hong Kong in particular.
Abstract This paper attempts to determine how effective the arbitrary pricing theory can be when it is applied to the current situation in Hong Kong to identify the market return and any possible macroeconomic factors such as interest rates, stock market indexes, GDP, inflation rate. The paper accomplishes this through an analysis of empirical studies and a review of current and chronological macroeconomic indicators for Hong Kong.
Outline:
Chapter 1: Introduction
Statement of the Problem
Purpose of Study
Importance of Study
Scope of Study
Rationale of Study
Overview of Study
Chapter 2: Review of Related Literature
Chapter 3: Methodology
Description of the Study Approach
Data-Gathering Method and Database of Study
Chapter 4: Data Analysis
Chapter 5: Summary, Conclusions, Recommendations and Reflections
From the Paper "Modern economics - and society - requires well-established laws to function efficiently. In this regard, the first law of economics is clearly the law of supply and demand, but the "law of one price" (hereafter simply "the Law") also plays an important role as well. While economic theory suggests that these processes will be maintained precisely in competitive markets with no transactions costs and no barriers to trade, in real world setting, details concerning market institutions are also important in determining whether disruptions in the law of supply and demand can occur (Lamont & Thaler, 2003). Many economists have traditionally assumed that the Law could be applied almost exactly in financial markets because of the workings of arbitrage. In this regard, these authors define arbitrage as "the simultaneous buying and selling of the same security for two different prices, is perhaps the most crucial concept of modern finance" (Lamont & Thaler, 2003, p. 191). "
Abstract High profile instances insider trading, so-called rogue trading, and other illegal activities occurring in the financial markets frequently raise questions about why or how such actions take place.
From the Paper "Investment Banking Culture and Fraud
Introduction
High profile instances insider trading, so-called rogue trading, and other illegal activities occurring in the financial markets frequently raise questions about why or how such actions take place. While many opinions have been offered, no definitive answer has emerged.
This study investigates the question: Do investment banks, because of their internal culture, lend themselves to the acts of fraudulent behaviors by some employees? This question is investigated through the testing of a related hypothesis. The HoHA research approach is followed in the formulation and testing of the hypothesis. The hypotheses are as follows:
Ho: There is no relationship between investment banking culture..."
From the Paper "Commodities Futures Market: Coffee
This research examines the commodities futures market in coffee. The functioning of the futures market in coffee, together with commodities contracts is explained. Hedging strategies for participants in the coffee futures market are discussed, and the significance of hedging techniques to bulk coffee traders is reviewed.
Functioning of the Futures Market in Coffee, and Commodities Contracts
The coffee trader relies on fundamental information about current crop and demand prospects (International Trade Forum, 1991, p. 20). Positions of big traders in the market are published publicly on a monthly basis. Trading in a commodity is suspended when the market becomes too volatile..."
Abstract The paper provides an overview of recent research on the economic and labor impact of offshoring IT services to low-cost destinations. The research identifies key determinants, recent trends, occupations affected, magnitude, and benefits of offshoring to the U.S economy. The analysis indicates that the current wave of offshoring involves IT services threatens mainly white-collar occupations in the low-income group, but is counterbalanced by job creation in the high-income sectors. The research argues that the jobs lost to offshoring are a negligible percentage; on the other hand, the reduction in costs of IT services due to offshoring will increase labor productivity, job creation, boost Gross Domestic Product, and further strengthen the U.S. economy.
Table of Contents
Abstract
1 Background
2 Definition of Terms
3 Determinants of Offshore Outsourcing
4 Outsourcing and Productivity
5 Protectionist Measures
6 Conclusion
References
From the Paper "Traditionally, cost reduction has been the overwhelming motivation and perceived payback for outsourcing. While offshore outsourcing is not new (companies have been offshoring manufacturing for many years and reaping significant cost and productivity improvements), the offshoring of business processes is still in its infancy. In the past, outsourcing has often been used tactically, as a rapid and often short-term solution to a particular need or problem, which did not form part of an overall business strategy. The experience of manufacturing illustrated that when it is possible to do things cheaper elsewhere in the world, the work will migrate there. With the relentless pursuit of the lowest global costs, offshoring is getting institutionalized in many companies. So much that firms might resort to a strategic use of outsourcing by working with one or more suppliers in order to effect a significant improvement in business performance. This enables the firm to focus on those products that lie closest to the company's core capability set and consider jettisoning the rest. "
Abstract This paper explores many concepts found in finance, such as present value and capital asset pricing model (CAPM). The paper examines three business models in order to better understand present value and discount rates. The paper also looks at the security of equity future and, more specifically, Wal-Mart's performance. The relationship between CAPM versus APT (Arbitrage Pricing Theory) is described, and the method used when determining a rate of return and capital budgeting purposes is explained.
From the Paper "One type of security is called an equity future. This is a contract guaranteeing your shares of a company to be delivered to you not today, but sometime in the future. What you would pay for such a contract? It depends on what price you expect the shares to be at in the future, and how volatile the stock is at the time of purchase or in other words what discount rate you should value this future payment of stocks). By looking at Yahoo Finance.com and at the five-year chart for Johnson and Johnson, the reference company I chose, one can learn a lot about the company. In comparison with Johnson and Johnson, what would you pay for 100 shares of Wal-Mart to be delivered to you in one year? Is it like comparing apples to orange or do the two companies have more in common than thought?"
Abstract This paper explains that the swaps, or contracts for differences, defined as synthetic securities involving combinations of two or more basic building blocks, are one of several financial derivatives used either to hedge different financial risks, such as interest rate risks or currency/foreign exchange risks or to obtain financial gains when they are used as speculative instruments. The author points out that the main characteristic of financial derivatives is the fact that they all work on imperfections of the financial markets; swaps are obviously either a speculating or an arbitrage instrument, much like forwards, futures or options. The paper relates that a swap agreement is beneficial to both parties when there is a split preference for fixed or floating, induced either by the necessities of the organization or the risk management policies that the company adopts.
Table of Contents
Interest Rate Swaps
Currency Swaps
Asset Swaps
From the Paper "The figure above best explains a classical swap mechanism . Bank A has a AAA credit rating, while Bank B has a BBB credit rating. This means that Bank B will have a higher fixed rate loan and company II will prefer to loan by using variable or floating rates. These are generally reported to LIBOR and can be, in this case, LIBOR + 0.75 %. Company I will make fixed-rate loans from the AAA bank at a fixed rate of 10 %. The general idea is that bank A will make floating- rate payments to bank B, and, B will make fixed- rate payments to A. The rates that the swap bank uses enter the calculations as well."
Abstract This paper researches the pharmaceutical industry and answers the question of whether the costs of pharmaceuticals in the United States are too high, and whether the cost of pharmaceuticals should be regulated. Further, this work attempts to answer the question of whether the Federal Drug Administration (FDA) is adequately protecting U.S. citizens from unsafe drugs and whether the U.S. Congress has been co-opted by the pharmaceutical industry. Finally, this work addresses the affordability of the new pharmaceutical benefit that was recently enacted under the Medicare Modernization Act.
Paper Outline:
Statement of Thesis
Introduction
Literature Review
Parallel Trading - Arbitrage of Pharmaceuticals
Case Study of Prescription Drug Movement by FDA and U.S. Customs
Medicaid's Prescription Plan - Passed April 2004
Putting Two and Two Together
Case Study in Relation to Costs-Markup by Medicare
Clinical Trials Report
Summary and Conclusion
Bibliography
From the Paper "A study was conducted by the Food and Drug Administration and U.S. Customs in 2001, tracking the movement of legal prescription drugs across seven of the U.S. borders crossings. Detected were 586 individuals carrying 1,120 drugs across borders in a four-hour period. Only half of these individuals were carrying valid prescriptions that were either U.S. or Mexican prescriptions. Politicians from Montgomery, Alabama and Springfield, Massachusetts also arbitrate drugs from Canada for their municipal employees and New England U.S. Department of Health and Human Services intends to provision 100,000 residents with arbitraged prescription medications. (Morais, 2004)"
Abstract The old cliche claims that if it is too good to be true, it usually is. Investors and speculators- reputable international banks, brokerages, real estate manipulators and arbitrage professionals, rushed to the new open markets in Southeast Asia. The paper shows that the governments there were eager for investment, but they had little or no regulatory controls in place. The stock markets in Thailand and Manila, in Singapore and Hong Kong went through the roof, only to crash and leave countless people owing billions of dollars, and the economies of many nations in Southeast Asia in tatters. The paper examines the causes of the crash and its influence on the U.S. economy.
Paper Outline:
Introduction
Its Causes
The Derivatives Fiasco
United States Actions and Reactions
Consequences of the Crisis
What Asian Governments are Doing
Effects of the Crisis on the U.S. Economy
Some Final Thoughts
References
From the Paper "The global position of the United States declined by roughly $25 billion (as, incidentally, did Western Europe's). This implies that, for the United States, it adds nearly $60 billion to the trade deficit - and even more in real terms (relevant to production and employment). Most of this deficit is due to the low valuation of South Korean and Japanese currency, prompting more imports into the United States. Deficits with Japan will increase by roughly $25 billion, and with South Korea, will increase about $10 billion. That means, Japan's surplus will increase more than $80 billion, all because of the Asian financial turmoil."
Tags: FSLIC, liabilities, Clinton, Administration, World, Bank
Abstract This paper defines insider trading and other financial terms. The author points out that the case relates to the question of how to deal with a question of insider trading at an investment banking firm. The paper relates methods of separating the research and the sales functions.
From the Paper "A working definition of insider trading is that it is an illegal activity that involves trading by management major shareholders or employees of a firm using information that is not yet publicly available. A working definition of the term investment banking firm is that it is a company that facilitates capital restructuring including initial public offerings as well as mergers acquisitions and leveraged buyouts. A working definition of the expression 'Chinese Wall' is an imaginary wall that separates the research department from other departments at ..."
Tags: Insider trading, investment banking, mergers and acquisitions, SEC, Securities and exchange commission, chinese wall, arbitrage, stock, controlling interest, Mebel, Doran, case study
Abstract "This paper compares two methods of assessing the risk of investments, the Capital Asset Pricing Model and a competing approach for asset pricing called the Arbitrage Pricing Theory, which was developed to address some of the criticisms of the CAPM. The paper considers which is preferable and why this may be so, based on how each is used and how their validity is established.
From the Paper "The Capital Asset Pricing Model is not the only asset pricing model around. One of the competing approaches asset pricing is called the Arbitrage Pricing Theory, which was developed to address some of the criticisms of the CAPM. The issue is which of the two approaches is the best and why. The CAPM is a model that describes the relationship between risk and expected return, a model that is used in pricing risky securities. According to this model, the expected return of a security is equal to the rate on a risk-free security plus a risk premium, and the investment should only be made it the return meets or beats the required return (Capital Asset Pricing Model - CAPM, 2005, para. 1). Risk is demonstrated here according to how closely a stock's price follows the market as a whole."
Abstract This paper examines the impact of the European Union's euro in the European markets and the international domain. The paper explains that the implementation of the new currency required careful and extensive preparation by the European Union, and the exchange rates at the beginning of implementing the euro were, on the whole, very challenging. The paper points out that one major impact and obvious benefit of the implementation of the euro is the removal of transaction costs of exchanging currencies between countries that use it and this means that businesses that trade within the Eurozone don't have differences in prices on their currency. In conclusion, the paper shows that since the euro's introduction in 1999 some notable effects have been the removal of transactions costs and exchange rates, arbitrage, European monetary policy and members' fiscal policies, and investment opportunities.
From the Paper "After intricate planning, the euro was ultimately born on January 1, 1999. It was created and intended to be used as a single currency throughout Europe and to assist in merging the European economies. The European Union wanted to unify these economies to make the EU more competitive with the alliance formed among the United States, Canada and Mexico under NAFTA and other various economic alliances (Madura 16). Only several countries adopted the euro at first while others rejected it. The countries that first adopted the euro were: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. On the other hand, the United Kingdom, Denmark, and Sweden had turned down the implementation of the euro. These countries that accepted the euro had phased out their old home currencies and completely implemented the euro on January 1, 2002."
Abstract This paper primarily attempts a discussion on three main concerns that stands out as critically important in the field of global outsourcing of jobs in the Canadian IT sector. Firstly it analyzes the future trends in the IT sector that can affect the production process as a whole. Secondly, it discusses outsourcing or more specifically off shoring as an outcome of the recent globalization and technological advancements that is rapidly changing the entire production and trading processes of information and technological industries. Finally, it tries to explain the interrelation between outsourcing and related economic aspects and its effects on Canadian IT sector. The economic aspects include the whole range of production process, economic growth, and behavioral changes in the labor market and an increase in national productivity.
Outline:
Executive Summary
Introduction
Is Outsourcing an Arbitrage?
Parameters of an Inherent Necessity
Benefits of IT Service Outsourcing
Management of Service Outsourcing
Technological and Managerial Advantage to Fight Against the Probable Threat
Conclusion
From the Paper "This is an age of globalised businesses, ever-expanding computer networks and international data flows. In this context the process of outsourcing has become a major component towards achieving higher economic growth rate and better competitiveness in the global economy. Canada already possesses a state of the art technological infrastructure, a skilled and educated labor force and low telecommunication costs. Outsourcing was always practiced as a valuable business process to enhance growth. Bigger business organizations sourced contract jobs from across the shore to deliver better customer satisfaction at reduced cost. This way they also managed to enhance their critical to quality business core functions and improve the productivity of their workforce. With a boom in the IT sector, more specifically in the information, technology and communication industry, the need to outsource has become more necessary than ever."
Abstract This paper explains that behavioral asset pricing models, based on real life behavior, are becoming more relevant and important. The author identifies the salient features of this model and compares traditional, capital (CAPM), arbitrage-pricing (APT), consumption capital (CCAPM), Fama-French 3 factor, fundamentalist and chartist and behavioral asset pricing models. The paper concludes that the behavioral asset pricing model appears to provide one of the better approaches to addressing confounding issues particularly when compared to traditional models. The paper includes detailed summary charts.
Table of Contents:
Introduction
Review and Discussion
Evolution of Asset Pricing Theories
Table: Comparison of Asset Pricing Models
Summary and Conclusion
From the Paper "These new concepts concerning how "real people" make decisions have fueled the rapidly growing fields of behavioral finance. This emphasis on developing a better understanding of real-world decisions made by real people, then, is the essence of behavioral finance. Therefore, from a behavioral finance perspective, economic theory should not necessarily result in the expectation that financial markets are efficient; to the contrary, significant and systematic fluctuations from efficiency can be reasonably expected to endure for lengthy periods of time."
