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Consider the following three securities that pay the following cash flow in one year (and no cash flow thereafter), depending on whether the economy
Consider the following three securities that pay the following cash flow in one year (and no cash flow thereafter), depending on whether the economy is strong or weak. Both scenarios are equally likely.: Market Price Cash Flow in One Year Week Strong Security Today Economy Economy A 100 520 0 B 400 0 520 C ??? 520 2080 Suppose that security C has a risk premium of 26%. Describe what arbitrage opportunity exists and how you would exploit it.
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