You smell an arbitrage opportunity! You have already bought 1,000 units of bond A, 1,000 units of bond B and 11,000 units of bond C. How many units of bond D should you buy (input a negative number if you sell) to book a profit for sure today with no net cash flows in the future?

 

1) What is your profit (in dollars)?

 

2) What should be the price of bond D to avoid arbitrage? Use a three-digit precision in your final result?

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While looking for assets to invest in, you find the following risk-free zero-coupon bonds (A, B and C) and coupon bond D (assume that the coupon payments are made at year end). Prices and face values are expressed in dollars. Bond A B с D Maturity (in years) 1 2 3 3 Face Value Coupon rate 0% 0% 0% 10% 1 1 1 1 Price 0.985 0.953 0.912 1.231 While looking for assets to invest in, you find the following risk-free zero-coupon bonds (A, B and C) and coupon bond D (assume that the coupon payments are made at year end). Prices and face values are expressed in dollars. Bond A B с D Maturity (in years) 1 2 3 3 Face Value Coupon rate 0% 0% 0% 10% 1 1 1 1 Price 0.985 0.953 0.912 1.231

Answer rating: 100% (QA)

To identify the arbitrage opportunity and calculate the profit we need to determine the synthetic pr... View the full answer