4.[10 points] There are four bonds, A, B, C, D, with the following cash flows (dates...

 

Transcribed Image Text:

4.[10 points] There are four bonds, A, B, C, D, with the following cash flows (dates in years, entries in $): Date 0 1 2 3 A -134 150 10 30 B -0.8 1 0 0 C -0.7 0 1 0 D 0 0 -0.5 1 (a) (4pts) Construct an arbitrage in this market. (b) (1pt) To eliminate the arbitrage opportunity, what should be the price for A? (c) (5pts) To eliminate the arbitrage opportunity, what should be the price for D? 4.[10 points] There are four bonds, A, B, C, D, with the following cash flows (dates in years, entries in $): Date 0 1 2 3 A -134 150 10 30 B -0.8 1 0 0 C -0.7 0 1 0 D 0 0 -0.5 1 (a) (4pts) Construct an arbitrage in this market. (b) (1pt) To eliminate the arbitrage opportunity, what should be the price for A? (c) (5pts) To eliminate the arbitrage opportunity, what should be the price for D?