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Consider a market in which currently two assets are traded: (1) A stock, currently selling for $40, which is expected to increase in value by 40% or decrease in value by 20% every year. (2) A zero-coupon risk-free bond with one year maturity that costs $100 and offers 2% annually compounded interest. Suppose the financial institutions are considering the sale of the third asset with maturity of one year whose value at maturity equals max(S-40, 0)? S is the value of the stock at the time the asset matures and max(x, y) equals the greater of the two values x and y. a) What should be the fair price of this asset today? b) Supposethepriceofthisassettodayequals$4.Isthereanythingyoucoulddoto make arbitrage money and implement your "Bora-Bora dreams"? Show formally the arbitrage strategy.
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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