Chapter 7: Arbitrage-Free Valuation Framework

In this section

• Law of One Price and No-Arbitrage Valuation
  Explore how the law of one price lays the groundwork for no-arbitrage pricing, replication strategies, and fixed income valuation.
• Valuing Zero-Coupon Instruments
  Explore zero-coupon bond valuation through an arbitrage-free lens, covering discounting methods, bootstrapping spot yield curves, and practical applications in fixed income investments.
• Pathwise vs. Spot Curve Pricing
  Explore the contrasting methods of pathwise and spot curve pricing, understanding how each approach discounts future bond cash flows and captures or omits path-dependent features.
• Practice Vignette: Constructing Arbitrage-Free Prices
  Learn how to derive missing spot rates, discount factors, and consistent bond prices using no-arbitrage principles. This practice vignette guides you step by step through the bootstrapping process while highlighting potential pitfalls, transaction costs, and real-world complexities.