Consider two securities that pay risk-free cash flows over the next two years and that have the 1 answer below »
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Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here:
Security
Price Today ($)
Cash Flow in One Year ($)
Cash Flow in Two Years ($)
B1
94
100
0
B2
85
0
100
a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years?
b. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500 in two years?
c. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?
