Question
Suppose that there are two securities, RAIN and SUN. RAIN pays $100 if there is any rain on the day of the soccer world cup
Suppose that there are two securities, RAIN and SUN. RAIN pays $100 if there is any rain on the day of the soccer world cup final, $0 otherwise. SUN pays $100 if there is no rain, $0 otherwise. Suppose the soccer world cup final is 1 year from today, and suppose that RAIN is trading at a price of $23 and SUN is trading at a price of $70.
(c) Suppose that a 1-year zero coupon bond with face value $100 is trading at $90. Show how you would set up a transaction to earn a risk less arbitrage profit (Assume no trading costs).
(d) Suppose that trading zero-coupon bonds is costless, but trading RAIN and SUN each cost $2 per $100 face value. Can you still make an arbitrage profit?
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