Assume that a 12% coupon bond maturing in 2 years sells for $108 while an 8% bond maturing in 2
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How can you make an arbitrage by trading only these three bonds?
State how many of each bond you want to buy or sell (assume you can freely short-sell any bond) and your net cash at each point in time? Note that to make arbitrage you must have non-negative profit at any point in time and strictly positive profit at least at one point in time.