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Find an arbitrage investment strategy

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Consider a market with a risk-free bond B, for which Do = 50, = 55, Primer on Pricing Risky Securities 81 and 82 = 60, and a risky stock with the spot price So = 50. Suppose that the stock price at times t = 1 and t = 2 can follow four possible scenarios:

Scenario S1   S2
    w1     60   70
    w2     60   55
    w3     45   45
    w4     45   40

(a) Find an arbitrage investment strategy if there are no restrictions on short selling.

(b) Is there an arbitrage opportunity if no short selling of the risky asset is allowed?

Reference no: EM13843359

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