What does the no-arbitrage condition imply about the price

Reference no: EM13260234

Suppose that there are two securities, RAIN and SUN. RAIN pays $100 if there is any rain on the day of the soccer world cup final, $0 otherwise. SUN pays $100 if there is no rain, $0 otherwise. Suppose the soccer world cup final is 1 year from today, 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 with face value $100 (Assume no trading costs.)

Reference no: EM13260234

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