3. Replication and Arbiluge- 20 Points Consider the following bond prices and cash flows: Price...
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3. Replication and Arbiluge- 20 Points Consider the following bond prices and cash flows: Price Cash Flow Time T 0 1 2 3 Bond A 1246.7 150 200 1230 Bond B 999.8 50 100 11.30 Bond c 1001.2 70 1070 0 Bond D 952.3 1000 0 0 Is there an arbitrage opportunity in the above system of prices and cash flows? If so, derive an arbitrage strategy which will generate $1 million profit initially with zero payout at all future dates. 3 3. Replication and Arbiluge- 20 Points Consider the following bond prices and cash flows: Price Cash Flow Time T 0 1 2 3 Bond A 1246.7 150 200 1230 Bond B 999.8 50 100 11.30 Bond c 1001.2 70 1070 0 Bond D 952.3 1000 0 0 Is there an arbitrage opportunity in the above system of prices and cash flows? If so, derive an arbitrage strategy which will generate $1 million profit initially with zero payout at all future dates. 3
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