Two securities a and b are convertible one-for-one during a, Financial Management

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Two securities a and b are convertible one-for-one during a

Two securities A and B are convertible one-for-one during a one hour window one year form today. A is selling today for $40.00.

(a) What is the no-arbitrage price of B?

(b) What is the no-arbitrage relationship of A and B during the coming year?

(d) Half way through the year B will pay its owner a $2.00 per unit risk-free dividend. The risk-free rate is 4% per year (2% per half). What is the no-arbitrage price of B today now?

(e) If B’s price is $40.00 show how do make an arbitrage profit.

(f) What is the no-arbitrage relationship between A and B from now until the dividend is paid?

(g) What is the no-arbitrage relationship between A and B from the time the dividend is paid until the conversion window closes?

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Financial Management: Two securities a and b are convertible one-for-one during a

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