Arbitrage

The payoffs of assets A, B and C in time periods 0 (current), 1 and 2 are as follows.

		Payoffs at Time period
		0	1	2
Asset	A	?	500	750
	B	-350	200	250
	C	-500	300	500

a) What is the fair price of asset A?

b) Suppose the price of A as traded in the market is 770. What is the trade to take advantage, be clear about ratio of securities and gains?

c) Suppose B trades at a bid price of 330 and an ask price of 370, instead of 350 above. Suppose C trades at 470 bid and 530 ask. Suppose A is bid at 740 and offered at 805. How does this change the economics of the trade in (b) above?

d) How do borrow costs affect the profit/ loss of the trade? What about the interest earned on short proceeds?