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Imagine that there are 2 securities trading. The first pays $1 in 6 months if Manchester United win the English Premier League (which, of course, we all know will happen). The second pays $1 in 6 months if Manchester United do NOT win the Premier League. The prices of these 2 securities are $0.80 and $0.18, respectively.
a. Assuming no transaction costs for buying or selling any securities, what must be the price of a 6-month, zero coupon bond with a face amount of $1,000?
b. If a 6-month, zero coupon bond sells for $985, what is the arbitrage strategy (again assuming no transaction costs)? What is the profit today per $1,000 face amount of zero coupon bonds?
c. If it costs $0.01 to buy or sell each of the Manchester United securities, what restrictions does the no arbitrage condition put on the price of a 6-month zero coupon bond?
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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