Question 57

1. Suppose you live in the Fama-French three-factor model world. Goldman Sachs is selling two derivative securities to your company. Both will pay 100 million dollars over a 10 year period. Assume time value of money is zero.

   Security A will pay 10 million each year for sure.

   Security B will will randomly pay out cash that is unrelated to anything (i.e., there is no correlation with any of the three factors).

   		A=100 million because A is risk free; B<100 million because B is risky.
   		A=B and both are smaller than 100 million
   		A
   		B is not risk free but its risk does not matter. So A=B and both are priced at 100 million.