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Market Price Cash flow in One Year Security Today Poor Economy Good Economy A 250 840 0 B 550 0 840 C ??? 1680 2520
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| Market Price | Cash flow in One Year |
|
| Security | Today | Poor Economy | Good Economy |
| A | 250 | 840 | 0 |
| B | 550 | 0 | 840 |
| C | ??? | 1680 | 2520 |
The likelihood of being in a poor economy or in a good economy is the same.
- (2 points) Based upon the information provided about securities A, B, and C, what is the risk-free rate of interest?
- (2 points) What is the no-arbitrage price for security C is?
- (2 points) Assume that security C has a risk premium of 30%. What is its price that may allow for arbitrages?
- (2 points) Assume that security C has a risk premium of 30%. What arbitrage opportunity exists and how would you exploit it?
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Fundamentals Of Futures And Options Markets
Authors: John Hull
9th Edition
0134083245, 9780134083247
