Purchase Solution

Securities

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution

Solution Summary

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

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 ...

Purchase this Solution


Free BrainMass Quizzes
Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.