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 ($) Cash Flow in One Year ($) Cash Flow in Two Years ($) B1 94 100 0 B2 85 0 100 a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years? b. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500 in two years? c. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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17. 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 ($) Cash Flow in One Year ($) Cash Flow in Two Years ($)
B1
94
0
100
0
B2
85
100
a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100
in two years?
b. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500
in two years?
c. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a
price of $130. What arbitrage opportunity is available?
Transcribed Image Text:17. Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here: Security Price Today ($) Cash Flow in One Year ($) Cash Flow in Two Years ($) B1 94 0 100 0 B2 85 100 a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years? b. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500 in two years? c. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?
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