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    Securities

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    Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here:

    Security Price Today ($) Cash Flow Cash Flow
    in One Year ($) in Two Years ($)
    ______________________________________________________________________
    B1 94 100 0
    B2 85 0 100

    1) What is the no-arbitrage price of a security tht pays cash flows of $100 in one year and $100 in two years?

    2) What is the no-arbitrage price of a security tht pays cash flows of $100 in one year and $500 in two years?

    3) Suppose a security with cash flows of $50 in on year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?

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    https://brainmass.com/economics/trade-agreements/securities-249364

    Solution Preview

    Please see the attachment for solution.

    1) What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years?

    The no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years = 94 +85
    = $179 (since this is ...

    Solution Summary

    The solution discusses the determination of the no-arbitrage price of a security.

    $2.19