Posted: September 23rd, 2016
-No-Arbitrage and Security Prices-
Consider two securities that pay risk-free cash flows over the next years and that have the current market prices shown here:
Security Price Today($) Cash flow in One Years ($)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?
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