Today is February 15, 2011 and the price of a Treasury bill with a par value of $100 that matures on August 15, 2011 is $99, while the price of a Treasury strip with a par value of $100 that also matures on August 15, 2011 is $98. Assume there are no taxes, illiquidity effects on prices, or trading costs. Which of the following statements is correct?

• A. There are no arbitrage opportunities available.
• B. There is an arbitrage opportunity and the opportunity is buying the August 15, 2011 Treasury bill and selling the August 15, 2011 Treasury strip in the ratio of 1:1.
• C. There is an arbitrage opportunity and the opportunity is selling the August 15, 2011 Treasury bill and buying the August 15, 2011 Treasury strip in the ratio of 1:1.
• D. There is an arbitrage opportunity and the opportunity is buying the August 15, 2011 Treasury strip.
• E. There is not enough information to determine whether an arbitrage opportunity is available.

Answer rating: 100% (QA)

The detailed answer for the above question is provid... View the full answer