Law of One Price:

The law of one price is an economic thought that states that the price of an equivalent wealth or
goods will have the identical price globally, regardless of area or location, when certain factors
are deliberated.
The law of one price is the foundation of purchasing power balancing. Purchasing power
balancing states that the value of two currencies is equal when a basket of same goods is priced
the same in both countries. It ensures that buyers have the equal purchasing power across
universal markets.
The law of one price commonly holds in financial markets. Economists believe that the law of
one price is more precisely applicable in financial markets than in international trade since there
are fewer potential trade barriers in the former.
The law of one price primarily endure due to incentives for arbitration. If the prices of similar
products diverge across the markets, arbitration opportunities arise as a trader may buy a product
at a lower price in a market and sell it at a higher price for a net profit instantly in another
market.
Economic theory notes that eventually, supply and demand mechanisms would converge prices
across economies, thereby reducing arbitration incentives.
However, in reality, the law of one price does not always hold true. Say, if the trade of goods
involves transaction costs or trade barriers, the law will not work.

Price or Earning Multiple:

The price or earnings ratio is the ratio for valuing a company that measures its current share price
relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as
the price multiple or the earnings multiple.
Price/Earnings ratios are used by investors and analysts to determine the relative value of a
company's shares in an orange-to-orange comparison. It can also be used to compare a company
against its own previous record or to compare aggregate markets against one another or over
time.
For example, a high Price/Earnings Ratio tells you that a stock price is high compared to
company earnings and may be overvalued. Similarly, a low Price/Earnings Ratio indicates that
the share price is low compared to company earnings and is undervalued. However, you must
determine if the reason for the share price being low is the company’s underperformance over
some time.
Formula is:
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑃𝑟𝑖𝑐𝑒 𝑜𝑟 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Arbitrage:
Arbitrage is the strategy of taking better option of price differences in different markets for the
equivalent asset. For it to take place, there must be a situation of at least two same assets with
differing prices. In short, arbitrage is a situation where a trader can profit from the imbalance of
asset prices in different markets. The simplest form of arbitrage is purchasing an asset in the
market where the price is lower and after that selling the asset in the market where the asset’s
price is higher.
We can make an example of arbitrage.
Jahangir Kobir, at 6 years old saw that he could profit from arbitrage. He would buy a 6-pack of
Pepsi for 25$ and sell each bottle for 5$ in his neighborhood, profiting 5$ per pack. Young
Jahangir Kobir saw that he could profit from the difference in the price of a six-pack versus what
people were willing to pay for a single bottle.
We can also show a picture to understand arbitrage in more precise way.

High Price Market

Selling

Investor
Buying

Low Price Market

Triangle Arbitrage:
Triangular arbitrage is the final destination of a discrepancy among three foreign currencies that
occurs when the currency's exchange rates do not exactly same. These opportunities are rare and
traders who take advantage of them usually have advanced computer equipment and/or programs
to prepare the process.
Triangular arbitrage is a system of low-risk profit-making by currency traders that takes benefits
of exchange rate discrepancies through algorithmic trades.
We can understand it with a short example.
Suppose a trader employing triangular arbitrage, for example, he would exchange an amount at
one rate (EUR/USD), convert it again (EUR/GBP), and then convert it finally back to the
original (USD/GBP), and assuming low transaction costs, net a profit.
For better understanding we can draw a picture of it.
EUR

EUR/GBP EUR/USD

GBP USD
GBP/USD
Figure: Triangle Arbitrage among EUR USD & GBP.

Book Value:
Book value is an asset's basic cost, less any accumulated depreciation and impairment charges
that have been subsequently incurred. The book values of wealth are routinely compared to
market values as part of various financial analyses. For example, if you bought a machine for
$100,000 and its associated depreciation was $25,000 per year, then at the end of the second
year, the machine would have a book value of $75,000. If an impairment charge of $10,000 were
to be applied at the end of the second year, the book value of the asset would decline further, to
$50,000.

The book value concept is overrated, since there is no direct contact between the market value of
an asset and its book value. At best, book value can only be considered a weak replacement for
market value, if no other valuation information is available about an asset.
Therefore we can explain book value in a short way, that it is equal to the cost of bearing an asset
on a institution's balance sheet, and firms calculate it netting the asset against its accumulated
depreciation.
We can also derive a formula for book value.
𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Market Value:
Market value is the state used to explain how much an asset or a firm is worth on the financial
market, according to market participants. It is commonly used to refer to the market
capitalization of a company, which is calculated by multiplying the number of shares in
circulation by the current market price.
Market value is also used to refer to the market capitalization of a publicly traded company, and
is calculated by multiplying the number of its outstanding shares by the current share price.
So we can make simple formula of market value.
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑐𝑖𝑟𝑐𝑢𝑙𝑎𝑡𝑖𝑜𝑛 × 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
To calculate the market value of a company, you would take the total shares outstanding and
multiply the figure by the current price per share. For example, if BRB Limited has 10,000
shares in circulation on the market, and each share is priced at $65, its market value would be
$6.5 million (10,000 x $65).

Purchasing Power Parity:

Purchasing power parity is the rate at which the currency of one country would have to be
converted into that of another country to buy the same amount of goods and services in each
country.
Purchasing power parity is a popular metric used by macroeconomic analysts that compares
different countries' currencies through a "basket of goods" approach.
Purchasing power parity allows for economists to compare economic productivity and standards
of living between different countries.
Some countries adjust their gross domestic product (GDP) figures to reflect PPP.
We can show this fact in graph.

Ep/$

Q$

Figure: Purchasing Power Parity in graph.

Both the shift in demand and supply will cause an increase in the value of the dollar and
thus the exchange rate (Ep/$) will rise. As long as the U.S. market basket remains cheaper,
excess demand for the dollar will persist and the exchange rate will continue to rise. The
pressure for change ceases once the exchange rate rises enough to equalize the cost of mar-
ket baskets between the two countries and PPP holds.
Real Interest Rate Parity:
The interest rate parity theory explains a relationship between the exchange rate and interest
rates of two countries.
According to the theory, the forward exchange rate should be equal to the spot exchange
rate times the interest rate of the home country, divided by the interest rate of the foreign
country. Parity is used by forex traders to find arbitrage opportunities.
We can show the relationship in a simple formula.
1 + 𝑖𝑐
𝐹0 = 𝑆0 × ( )
1 + 𝑖𝑏
where:
F0=Forward Rate
S0=Spot Rate
ic=Interest rate in country c
ib=Interest rate in country b
Call Provision:
All provision is a part of a loan agreement which allows the financial organization or person
who lent the money to demand payment at a particular time or in particular situations.
It is a predefined condition on the bond that allows the issuer to retire or repurchase the debt
security attached to the financial instrument. Numerous events can trigger a bond call provi-
sion, such as the underlying asset reaching a specific target price or a date. However, the most
common is the falling market interest rates below the bond’s coupon rate.
Suppose you buy a bond of Tk 75,000 with a maturity of 15 years and a coupon rate of 6%.
However, the bond came attached with the clause of call provision, giving the issuer the
right to call the bond and repurchase it from you any time after three years.
Two situations can happen after five years: the market interest rate may fall below 7%, or it
can rise above 6%. If it rises above 6%, the bondholder may sell the bond and buy a new
one as more bonds will be available with a higher interest rate. However, suppose the inter-
est rate falls below 6%. In that case, the issuer will incur losses if the company continues to
pay a higher interest rate when new bonds are available in the market with much lesser in-
terest rates.
To protect themselves by paying unnecessarily higher interest, the issuer may exercise the
bond call provision right and call the bond. They repay the principal amount to the bond-
holder at the accrued interest rate and retire the debt security.
There are some types of call provision such as:
• Optional Call Provision
• Sinking Fund
• Extraordinary Call Provision
• Mandatory Call Provision

Put Provision:
A provision, attached to a puttable bond, which allows the bondholder to put (give back) the
bond to the issuer for a specified cash price on predetermined dates according to the put
schedule. This provision provides the bondholder with downside protection, and as such add
extra value to the bond (compared with similar non puttable bonds). From the perspective of
the bondholder, a put provision is equivalent to a put option whose seller and buyer are the
seller and buyer, respectively.
Essentially, a put provision is to the bondholder what a call provision is to the bond issuer.
When a bond is purchased, the issuer will fix dates at which the bondholder may choose to
exercise the put provision and redeem their bond prematurely to receive the principal
amount. A put provision will generally specify multiple dates when the bond may be re-
deemed before the maturity date. Multiple dates provide the bondholder with the ability to
reassess their investment every few years, in the event, they wish to redeem for reinvest-
ment.
Put provisions protect the bondholder from reinvestment risk. Suppose interest rates rise and
the bondholder suspects that a different type of investment could ultimately be more attrac-
tive than the one they currently own. They could exercise the put provision and redeem this
bond to reinvest in the other firm. For example, a bondholder may purchase a bond when
interest rates are at 4.25%. However, if interest rates rise to 5.75%, they may start to con-
sider their bond’s rate of 4.25% undoubtedly low and want to redeem it, so as to reinvest it
at the current higher interest rate.

Sinking Fund:
A sinking fund is a type of fund that is created and set up purposely for repaying debt. The
owner of the account sets aside a certain amount of money regularly and uses it only for a
specific purpose. Often, it is used by corporations for bonds and deposits money to buy back
issued bonds or parts of bonds before the maturity date arrives. It is a way of enticing inves-
tors because the fund helps convince them that the issuer will not default on their payments.
Basically, the sinking fund is created to make paying off a debt easier and to ensure that a
default won’t happen because there is a sufficient amount of money available to repay the
debt. Though most bonds take several years to mature, it is always easier and more conven-
ient to be able to reduce the principal amount long before it matures, consequently lowering
credit risk.
Let's say for example that Walton Corporation issued US$5billion in long-term debt in the
form of bonds. Interest payments were to be paid semiannually to bondholders. The com-
pany established a sinking fund whereby $1.5 billion must be paid to the fund each year to
be used to pay down debt. By year three, ExxonMobil had paid off $3.5 billion of the $5 bil-
lion in long-term debt.
The provision will then allow him to buy back the bonds at a lower price if the market price
is lower or at face value if the market price goes higher. Eventually, the principal amount
owed will be lower, depending on how much was bought back. However, it is important to
remember that there is a certain limit to how many bonds can be bought back before the ma-
turity date.
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