Explore BrainMass

Arbitrage and Value of Money Problem

Please see the attachment.
Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2million worth of inventory. Customer picks up entire order the same day and pays $1million upfront in cash; you also issue a bill for the customer to pay the remaining balance of $4million within 30 days. Suppose your firm's tax rate is 0%(ignore taxes). Determine possible consequences of this transaction for each of the following:

Problem 2
Your firm has identified 3 potential investments. The projects and their cash flows are shown here:

Project Cash flow Today Cash flow in one year
A -10 20
B 5 5
C 20 -10

Suppose all cash flows are certain and risk-free interest rate is 10%
a)What is NPV of each project
b)If the firm can chose only 1, which should it choose?
c)If the firm can choose any 2, which should it choose?

Problem 3

Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans.

a)what arbitrage opportunity is available?
b)which bank would experience a surge in the demand for loans?which bank would get a surge in deposits?
c)What would you expect to happen to the interest rates the two banks are offering?

Problem 4

The promised cash flows of three securities are listed below. If the cash flows are risk-free and risk-free interest rate is 5%, determine the no-arbitrage price of each security before the first cash flow is paid

Security Cash Flow today Cash flow in 1 Year
A 500 500
B 0 1000
C 1000 0


Solution Summary

The solution explains some questions relating to Arbitrage and Value of Money