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please answer B and C for me, Thanks Market Price Cash Flow in One Year Security Poor Economy Today Good Economy A 200 840 0
please answer B and C for me, Thanks
Market Price Cash Flow in One Year Security Poor Economy Today Good Economy A 200 840 0 B 600 0 840 ??? 840 4200 a) Based upon the information provided about securities A, B, and C, the risk-free rate of interest is closest to (hint: combine A and B to create risk-free cash flows): From A : p* 840 / (1 + r) = 200 From B: (1-P) * 840 / (1 + r) = 600 p/(1 - p) = 1/3 p = 1/4 So, r = 1/4* 840 / 200 - 1 r= 5% | b) What is the no-arbitrage price for security C according to law of one price (hint: you may need to include more than one share of the security to create identical cash flows when applying PC) = P (A+B)? c) If the current market price is 2,800, how do you take advantage of this arbitrage opportunity (hint: buy the underpriced; sell the overpriced)Step by Step Solution
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