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Consider three securities that pay risk-free cash flows over the next three years and that have the current market prices shown here: Security Name Price
Consider three securities that pay risk-free cash flows over the next three years and that have the current market prices shown here:
Security Name | Price Today ($) | Cash Flow in One Year ($) | Cash Flow in Two Years ($) | Cash Flow in Three Years ($) |
B1 | $94.70 | 100 | 0 | 0 |
B2 | $88.50 | 0 | 100 | 0 |
B3 | $411.60 | 0 | 0 | 500 |
Calculate the no-arbitrage price, or the price that eliminates any arbitrage opportunities, of a new security, B4, that pays risk-free cash flows of $100 in one year and $500 in two years.
The current no-arbitrage price of Security B4 is:
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