Question
An investment company is studying the creation of a financial security that will bear the symbol CSI and will give right to a payment in
An investment company is studying the creation of a financial security that will bear the symbol CSI and will give right to a payment in one year of $150 in the pessimistic scenario and $260 in the optimistic scenario. The risk-free interest rate is 3%. Consider the two financial stocks ATX and BLU whose prices in the absence of a learning opportunity are as follows:
Titles | Market price today in $ | Flows in 1 year according to the scenario in $ | |
Pessimist | Optimist | ||
ATX | 55 | 35 | 70 |
BLU | 95 | 80 | 120 |
a) Is it possible to replicate CSI by combining ATX and BLU? b) What is the price of CSI stock if there is no arbitrage opportunity? c) If the probability of realization of the pessimistic scenario is 40% and that of the optimistic scenario is 60%. What is the expected return on the CSI asset? What is the risk premium? d) If the risk premium of CSI stock is 0.75%, is there an arbitrage opportunity?
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