Hi! I need you to answer all these questions of your own words, so can you help me answer these ASAP and simple, please just write it simply not too much profession so my lecturer not gonna suspect anything. here are the questions and example answer.

Chapter 1 3. Define arbitrage and the law of one price. What role do they play in the U.S. market system? What do we call the \"one price\" of an asset? 4. Suppose you are shopping for a new automobile. You find the same car at two dealers but at different prices. Is the law of one price being violated? Why or why not? 7. What are the major functions of derivative markets in an economy? 8. Why is speculation controversial? How does it differ from gambling? 17. If an individual anticipates the price of a stock falling, how would he go about shorting the stock to capture a profit? How does his short position create a liability? Chapter 2 3. How are swaps like combinations of forward contracts? 4. What is a real option? Why is it important in understanding how companies make decisions? 12. Why is the bid-ask spread a transaction cost? 15. What is the difference between an initial margin and a maintenance margin? 17. Explain the differences among the three means of terminating a futures contract: an offsetting trade, cash settlement, and delivery. Module 1 Answers to discussion questions Chapter 1 3. (Arbitrage and the Law of One Price) Arbitrage is a type of investment transaction that seeks to profit when identical goods are priced differently. Buying an item at one price and immediately selling it at another is a type of arbitrage. Because of the combined activities of arbitrageurs, identical goods, primarily financial assets, cannot sell for different prices for long. This is the law of one price. Arbitrage helps make our markets efficient by assuring that prices are in line with what they are supposed to be. In short, we cannot get something for nothing. A situation involving two identical goods or portfolios that are not priced equivalently would be exploited by arbitrageurs until their prices were equal. The "one price" that an asset must be is called the \"theoretical fair value.\" 4. (Arbitrage and the Law of One Price) The law of one price is violated if the same good is selling at different prices. On the surface it may appear as if that is the case; however, it is important to look beneath the surface to determine if the goods are identical. Part of the cost of the good is convenience and customer service. Some consumers might be willing to pay more because the dealer is located in a more desirable section of town. Also, the higher priced dealer may have a better reputation for service and customer satisfaction. Buyers may be willing to pay more if they feel that the premium they pay helps assure them that they are getting a fair deal. It is important to note that many goods are indeed identical and, if so, they should sell at the same price, but the Law of One Price is not violated if the price differential accounts for some economic value. 7. (Role of Derivative Markets) Derivative markets provide a means of adjusting the risk of spot market investments to a more acceptable level and identifying the consensus market beliefs. They make trading easier and less costly and spot markets more efficient. These markets also provide a means of speculating. 8. (Criticisms of Derivatives Markets) On the surface, it may be difficult to distinguish speculation from gambling. Both entail high risk with the expectation of high gain. The major 1 difference that makes speculation somewhat more socially acceptable is that it offers benefits to society not conveyed by gambling. For example, speculators are necessary to assume the risk not wanted by others. In gambling, there is no risk being hedged. Gamblers simply accept risk without there being a concomitant reduction in someone else's risk. 17. (Short Selling) If an individual anticipates the price of a stock falling, he can attempt to capture a profit by selling short. He would first borrow the stock from a broker and sell that stock in the marketplace. If the price of the stock then indeed fell, he would buy back the stock at a lower price. This would allow him to capture a profit and repay the shares to the broker. Short selling creates a liability in that the short seller is obligated to someday buy back the stock and return it to the broker; however, the short seller does not know how much he will have to pay to buy back the shares. Chapter 2 3. (Swaps) A forward is the obligation to pay a fixed price or rate and receive something whose value varies. A swap is a combination of forwards in that it provides multiple obligations to pay a fixed price or rate and receive something whose value varies. These multiple obligations have various expirations spaced over a defined period of time. 4. (Other Types of Derivatives) A real option is one of many rights a company has in many of its capital investment projects, such as the option to delay launching a project, extend the life of a project, or increase or decrease the scale of a project. Traditional net present value analysis merely discounts the expected cash inflows and outflows of an investment project but does not take into account the fact that after the project is started there may be additional information that can affect decisions a company would make. Traditional NPV analysis more or less makes all decisions for the life of the project at the start. 12. (Bid-Ask Spreads) The bid-ask spread is the cost of trading immediately, as opposed to having to wait on a buyer or seller to take the opposite side. You buy at the bid and sell at the ask, with 2 the latter higher. So, for example, if the price is $25 bid and $26 ask, you buy at the ask. If you immediately sell, you would sell at the bid, thereby incurring a $1 loss. 15. (Daily Settlement) An initial margin is the minimum amount that must be deposited on the first day or a transaction. The maintenance margin is the minimum amount that must be in the account any day thereafter. An exception, however, is that if a margin call occurs on a futures account, you must deposit sufficient funds to bring the balance up to the initial margin, not the maintenance. The additional funds that you must deposit is called the variation margin. 17. (Expiration and Exercise Procedures) An offsetting transaction involves a trader merely going into the market and doing the opposite of his previous trade. Thus, someone who previously bought an option or futures expiring in a certain month would sell an option or futures expiring in a certain month. A cash settlement occurs at expiration, and involves one party paying a cash amount owed to the other. Physical delivery involves one party delivering the underlying to the other, with the latter paying the former the amount owed. 3