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What arbitrage opportunity is available

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Reference no: EM133114373

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 in One Year

Cash Flow in Two Years

B1

$190

$200

0

B2

$174

0

$200

Required -

a. What is the no-arbitrage price of a security that pays cash flows of $200 in one year and $200 in two years?

b. What is the no-arbitrage price of a security that pays cash flows of $200 in one year and $1,800 in two years?

c. Suppose a security with cash flows of $100 in one year and $200 in two years is trading for a price of $260. What arbitrage opportunity is available?

Reference no: EM133114373

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