14. The following securities pay risk-free cash flows over the next three years: Cash Flows Security Price Today In 1 Year In 2 years In 3 Years B1 95 100 0 0 B2 B3 80 80 90 0 100 0 0 0 100 C ? 200 400 300 D 1,075 400 200 600 (a) What is the no-arbitrage price of security C? (b) Is security D correctly priced? If so, explain why. If not, demonstrate how you can exploit the arbitrage opportunity. (c) Determine the spot rates (to the nearest 0.01%) and the discount factors for this market.
14. The following securities pay risk-free cash flows over the next three years: Cash Flows Security Price Today In 1 Year In 2 years In 3 Years B1 95 100 0 0 B2 B3 80 80 90 0 100 0 0 0 100 C ? 200 400 300 D 1,075 400 200 600 (a) What is the no-arbitrage price of security C? (b) Is security D correctly priced? If so, explain why. If not, demonstrate how you can exploit the arbitrage opportunity. (c) Determine the spot rates (to the nearest 0.01%) and the discount factors for this market.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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