What does the no-arbitrage condition imply

Assignment Help Corporate Finance

Reference no: EM13194803

Suppose that there are two securities RAIN and SUN. RAIN pays $100 in there is any rain during the next world cup soccer final. SUN pays $100 in there is no rain. Suppose that the world cup soccer final is 1 year from today (although this is not true), and suppose that RAIN is trading at a price of $23 and SUN is trading at a price of $70.

(a) If you buy 1 share of RAIN and 1 share of SUN, what is your payoff after 1 year, depending on the weather?

(b) What does the No-Arbitrage Condition imply about the price of a 1-year zero-coupon bond? (Assume no trading costs.)

(c) Suppose that a 1-year zero-coupon bond is trading at $90. Show how you would set up a transaction to earn a riskless arbitrage profit. (Assume no trading costs.)

(d) Suppose that trading zero-coupon bonds is costless, but trading RAIN and SUN each cost $2 per $100 face value. Can you still make an arbitrage profit?

Reference no: EM13194803

Questions Cloud

Elevated risk of cardiovascular disease : Which one of the following characteristics is most closely associated with elevated risk of cardiovascular disease?

Define the mass of one liter of ch4 gas at same pressure : certain temperature and pressure, one liter of CO2 gas weighs 1.85 g. What is the mass of one liter of CH4 gas at the same temperature and pressure?

Genes can be combined-recombined through sexual reproduction : The study of inheritance in individuals tells us about how genes can be combined and recombined through sexual reproduction, but to see how species change over time as natural selection favors some combinations over others,

Determine the mass in grams of pbcl2 in the products : Find the mass in grams of PbCl2 in the products. In a test tube you have 1.0 mL of 0.10 M of NaCl mixed with 1.0 mL of 0.10M of NaCl. 2 NaCl + Pb(NO3)2 --> PbCl2 + 2 NaNO3

What does the no-arbitrage condition imply : What does the No-Arbitrage Condition imply about the price of a 1-year zero-coupon bond and suppose that trading zero-coupon bonds is costless, but trading RAIN and SUN each cost $2 per $100 face value. Can you still make an arbitrage profit?

Calculate the amount of revenue that will actually be raised : Calculate the property tax rate as a millage rate rounded to the nearest thousandth, given the following parameters: total assessed property value is $5.5 billion, total desired revenue is $75 million, the assessment ratio is 100%, and 15% of amou..

Communications technology upon social organization : list and explain some impacts of communications technology upon social organization today?

Define reaction of manganese dioxide with hydrochloric acid : Chlorine can be prepared in the laboratory by the reaction of manganese dioxide with hydrochloric acid, HCl(aq)

User Account

All Pages