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  3. market price cash flow in one year ...

Market Price Cash flow in One Year ...

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Question

Finance

Market Price

Cash flow in One Year

Security

Today

Poor Economy

Good Economy

A

250

840

0

B

550

0

840

C

???

1680

2520

The likelihood of being in a poor economy or in a good economy is the same.

  1. (2 points) Based upon the information provided about securities A, B, and C, what is the risk-free rate of interest?

  1. (2 points) What is the no-arbitrage price for security C is?

  1. (2 points) Assume that security C has a risk premium of 30%. What is its price that may allow for arbitrages?

  1. (2 points) Assume that security C has a risk premium of 30%. What arbitrage opportunity exists and how would you exploit it?

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