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 279 300 0 B2 255 0 300

a. What is the no-arbitrage price of a security that pays cash flows of $300 in one year and $300 in two years?

b. What is the no-arbitrage price of a security that pays cash flows of $300 in one year and

$2700 in two years?

c. Suppose a security with cash flows of $150 in one year and $300 in two years is trading for a price of $390. What arbitrage opportunity is available?

AppendixLO1