Posted: September 23rd, 2016

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

-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?