Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here:
Security Price Today ($) Cash Flow Cash Flow
in One Year ($) in Two Years ($)
______________________________________
B1 94 100 0
B2 85 0 100
Problem 1) What is the no-arbitrage price of a security tht pays cash flows of $100 in one year and $100 in two years?
Problem 2) What is the no-arbitrage price of a security tht pays cash flows of $100 in one year and $500 in two years?
Problem 3) Suppose a security with cash flows of $50 in on year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?