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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:
a)Revenues
b)Earnings
c)Receivables
d)Inventory
e)Cash

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