Reference no: EM13863914
Arbitrage and the Law of One Price
Assume for this problem that markets are frictionless (i.e. no transactions costs and no short-selling constraints). It's a week before the Cubs-White Sox game and you _nd a market that sells two securities:
_ CBS Security which pays $1 next week if Cubs win and $0 otherwise; currently trading at $0.75
_ WS Security which pays $1 next week if White Sox win and $0 otherwise; currently trading at $0.20
A. What is the risk-free rate if there is no arbitrage? (Do not worry about expressing this as an annualized percentage.)
Hint: What is the payo_ to the risk-free security if Cubs wins? What is its payo_ if White Sox win? Can you use the information given above to construct this security?
B. Suppose that the risk-free rate is 2% for a week. (i.e. $1 invested today pays o_ $1.02 in a week.) What strategy would you use to take advantage of this situation?
c. What would you expect to happen if CBS = $0.75, WS = $0.20, and r = 2%? In particular, would you expect prices to change? If so, how would they change? If not, why not?
|
Design a business plan for a restaurant
: Design a business plan. You can ascertain the selling price, variable cost, fixed cost and break even, desired profits and sales of the business
|
|
Calculate the gauge factor of the strain gauge
: A strain gauge measures 20 mm along its active length and has an unstrained resistance of 125 Ω. When put under strain the length changes to 20.032 mm and the resistance goes to 125.4 Ω. Calculate the Gauge Factor of the strain gauge.
|
|
Characteristics of effective team and intervention
: Characteristics of Effective Team and Intervention, Need 2 page summary of the characteristics of Open Communications, Listening and Self Assessment to a company that will be disclosed once we handshake
|
|
What is your guess as to roce expected for next fiscal year
: Its most recently reported ROCE was 10.1 percent, and it is deemed to have a required equity return of 10 percent. What is your best guess as to the ROCE expected for the next fiscal year?
|
|
Arbitrage and the law of one price
: Assume for this problem that markets are frictionless (i.e. no transactions costs and no short-selling constraints). It's a week before the Cubs-White Sox game and you _nd a market that sells two securities: What is the risk-free rate if there is no ..
|
|
Cost per equivalent unit for each of three cost items-total
: Regal Polish manufactures a single product in one department and uses a process costing system. At the start of May, there were 5,000 units in process that were 100 percent complete with respect to direct materials and 50 percent complete with respec..
|
|
Paper on personality
: Paper on Personality, The paper should provide, but not be limited to, the following information: A clear definition of the topic/issue selected and Explanation of how the topic pertains to the field of Organizational Behavior
|
|
Total amount of cash payments for merchandise
: A company's inventory balance was $204,000 at 12/31/11 and $191,600 at 12/31/12. Its accounts payable balance was $81,600 at 12/31/11 and $85,800 at 12/31/12, and its cost of goods sold for 2012 was $734,400. The company's total amount of cash paymen..
|
|
What recommendation regarding the final allocation amounts?
: recommendation regarding the final allocation amounts?
|