Arbitrage and the Law of One Price Suppose Bank One offers a risk-free interest rate of 5.5% on both 1 answer below »

Arbitrage and the Law of One Price

Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans.

a. What arbitrage opportunity is available?

b. Which bank would experience a surge in the demand for loans? Which bank would receive

a surge in deposits?

c. What would you expect to happen to the interest rates the two banks are offering?