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In fact, some have argued that because of frictions or inability to practically hedge, no-arbitrage arguments should not necessarily apply, or the no-arbitrage condition should not be required in a fair value framework.
Since puts, calls, and forwards are typically priced under no-arbitrage conditions, it is not surprising that all the above equivalence relationships result in the fair value of the nonmarketable and marketable security being equal.
Under ideal conditions, the no-arbitrage condition stipulates a relationship between short-term and long-term interest rates on securities of comparable credit quality.
First, we rewrite the no-arbitrage condition for Northern production.
Although the Euler equation for human capital reflects the contribution of human capital across both sectors, the no-arbitrage condition implies that individuals require the same rate of return to both factors of production.
Using the expression for profits (5) in the no-arbitrage condition (8), and rearranging terms, one can find that: (14)
3) The last section discusses how to translate the no-arbitrage condition for bond prices into a no-arbitrage condition for yields.
Thus the no-arbitrage condition requires that at any point in time
The no-arbitrage condition for a foreign asset with an income of X*(s) and its domestic perfect substitute yielding X*(s)e(s) is
99% accuracies when predicting no-arbitrage conditions.
As in the Vasicek (1977) model, the no-arbitrage conditions restrict the relative pricing of bonds with different maturities while remaining silent about all other conditions that characterize the equilibrium in the economy.
It first presents theoretical pricing relationships implied by no-arbitrage conditions.