What is an arbitrage-free interest-rate model?
What will be an ideal response?
An arbitrage-free interest-rate model is a model that allows one to interpolate the term structure of interest rates from a set of observed market prices at one point in time assuming that one can rely on the market prices used. Thus, in arbitrage-free models, also referred to as
no-arbitrage models, the analysis begins with the observed market price of a set of financial instruments. The financial instruments can include cash market instruments and interest-rate derivatives, and they are referred to as the benchmark instruments or reference set. The underlying assumption is that the benchmark instruments are fairly priced. A random process for the generation of the term structure is assumed. The random process assumes a drift term for interest rates and volatility of interest rates. Based on the random process and the assumed value for the parameter that represents the drift term, a computational procedure is used to calculate the term structure of interest rates (i.e., the spot rate curve) such that the valuation process generates the observed market prices for the benchmark instruments. The model is referred to as
arbitrage-free because it matches the observed prices of the benchmark instruments. In other words, one cannot realize an arbitrage profit by pursuing a strategy based on the value of the securities generated by the model and the observed market price. Non-benchmark instruments are then valued using the term structure of interest rates estimated and the volatility assumed.
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Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
a. It is difficult to prepare financial statements that fairly present a company's financial position, results of operations, and cash flows without the expertise of an independent auditor b. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements c. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements d. It is a customary courtesy that all shareholders of a company receive an independent report on management's stewardship in managing the affairs of the business
After and offer is accepted the buyer's $5,000 earnest money check is deposited into the broker's designated trust account. The buyer needs $250 of the deposited funds to pay for the termite inspection. Can the broker pay for the termite inspection from the deposited funds?
A. No, the trust can only be applied towards the purchase price. B. No, funds in a designated trust account can only be disbursed at closing. C. Yes, upon securing a written agreement signed by the buyer. D. Yes, upon securing a written agreement signed by all parties having an interest in the trust funds.