Red Dead Redemption 2 ETF trades for $295 today and owns 3 shares of Arthur Corp. and has sold short 2 shares of Uncle Corp. It also owns Treasuries that mature for $100 two years from today. The ETF will distribute all cash flows it receives from the securities it owns. Use the following information to create a table that shows the transactions today that generate an arbitrage profit today, the cash flows (individual and total) these transactions create today and two years from today. Arthur will pay off $120 in two years if the economy is strong and $90 in two years if the economy is weak and it trades for $100 today. Uncle will pay off $75 in two years if the economy is strong and will pay $40 in two years if the economy is weak and it trades for $50 today. Assume the risk-free interest rate equals 3% per year and that Red Dead Redemption 2 ETF trades for $390 today.

Set up a table that shows the trades you need to make today to generate the highest arbitrage profit per share of Red Dead Redemption 2, your arbitrage profit today, the cash flows each of your individual trades create today and two years from today, and the total cash flows your trades create today and two years from today.

Answer rating: 100% (QA)

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