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