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    Arbitrage and Value of Money Problem

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    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

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    Solution Summary

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