Fixed Income: Arbitrage to exploit violation of law of one price (FRM T4-24)

Financial Risk Manager (FRM), Topic 4: Valuation and Risk Models, Fixed Income, Bruce Tuckman Chapter 1, Prices Discount Factors and Arbitrage. How do we exploit the Law of One Price (which asserts that--absent confounding factors like liquidity or taxes--is only one set of discount factors)? We construct a replicating portfolio; i.e., a portfolio that produces the same stream of cash flows as the bond that is mis-priced. Then we purchase the bond/portfolio that is trading cheap and we sell (short) the bond that is trading expensive. In this example, net proceeds equal $0.065 which is only a few pennies. But leverage can increase the riskless profit to $325,000, wow! Discuss this video here in our FRM forum: trtl.bz/2YGGj2Y

[@SunilVerma-fv3tq]

Hi David..
Thanks a lot for the video..
One question should we also match dollar value per basis point of all the bonds as we are just matching cash, but with change in interest rate, impact will be different for all the 4 bonds and I believe this will impact the arbitrage..
Or its because we wish to held the bonds to maturity and hence the interest rate fluctuations won't impact in such case.
Please correct me if missing anything here...

[@chrisluala9937]

Are we able to access your excel worksheets from the videos?

[@convoluted_turtle]

This cover is nice...and i look forward to watch your videos when i start FRM after some point :)

[@bionicturtle]

Thank you for watching! We appreciate the positive feedback!

[@JohnNewman-fu5ru]

How would I calculate the face amount needed if one of the bonds in the replica portfolio is a zero-coupon bond?

[@santoshsingh5656]

SIR TERM IS JUMBLED UP IN VIDEO AS TERM IS SHOWN AS 0.5 ,1 AND 1.5 WHERE AS THEORETICAL VALUE IS CALCULATED FOR TERM OF 1,1.5 AND 2 YEARS .

[@santoshsingh5656]

FOR TABLE NO.1.4 OF TUCKMAN I MEAN

[@truonghung2095]

Yeah i agree, cuz he also take the trading cheap with 1.5yr not 1 yr