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Consider the following two securities: RAIN and SUN. RAIN pays $100 if it rains on NYU graduation day. SUN pays $100 if there is no rain. Suppose that RAIN is trading at a price of $27 and SUN is trading at a price of $70.
(a) If you buy 1 share of RAIN and 1 share of SUN, what is the payoff on NYU graduation day?
(b) According to the No Arbitrage Condition, what must be the price of a $100 face value zero-coupon bond that matures on NYU graduation day?
(c) Suppose that this zero-coupon bond is trading at $99. How would you set up a transaction to earn a riskless arbitrage profit? Assume no trading costs.
(d) Suppose that trading zero-coupon bonds is costless, but shorting RAIN and SUN each cost $1 per $100 face value. Can you still make an arbitrage profit?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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