EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 3, Problem 17P
Consider two securities that pay risk-
- a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years?
- b. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500 in two years?
- c. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?
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17. Consider two securities that pay risk-free cash flows over the next two years and that have the
current market prices shown here:
Security
Price Today
Cash Flow in One Year
Cash Flow in Two Years
В1
$192
$200
B2
$176
$200
a. What is the no-arbitrage price of a security that pays cash flows of $200 in one year
$200 in two years?
b. What is the no-arbitrage price of a security that pays cash flows of $200 in one year and
$1600 in two years?
c. Suppose a security with cash flows of $100 in one year and $200 in two years is trading for
price of $260. What arbitrage opportunity is available?
and
a
Assume that the Pure Expectations Theory of the term structure is correct. Also
assume that the interest rate today on a 9-year security is 6.40%, while the
interest rate today on a 15-year security is 8.00%. Finally assume that the
interest rate on a 3-year security to be bought at Year 9 and held over Years 10,
11, and 12 is 6.80%. Given this information, determine the average annual return
that investors today must expect that they will receive from investing in a 3-year
security in 12 Years (that is, buying the security at Year 12 and holding it over
Years 13, 14, and 15).
O 13.00%
O 12.50%
13.50%
O 12.00%
O 14.00%
The prices of a certain security follow a geometric Brownian motion with parameters mu=.12 and sigma=.24. If the security's price is presently 40, what is the probability that a call option, having four months until its expiration time and with a strike price of K=42, will be exercised? (A security whose price at the time of expiration of a call option is above the strike price is said to finish in the money.)
If the interest rate is 8%, what is the risk-neutral valuation of the call option?
Chapter 3 Solutions
EBK CORPORATE FINANCE
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Ch. 3.5 - Prob. 3CCCh. 3.A - The table here shows the no-arbitrage prices of...Ch. 3.A - Suppose security Chas a payoff of 600 when the...Ch. 3.A - Prob. A.3PCh. 3.A - Prob. A.4PCh. 3.A - Prob. A.5PCh. 3.A - Consider a portfolio of two securities: one share...Ch. 3.A2 - Why does the expected return of a risky security...Ch. 3.A2 - Prob. 2CCCh. 3.A3 - Prob. 1CCCh. 3.A3 - Prob. 2CCCh. 3 - Honda Motor Company is considering offering a 2000...Ch. 3 - You are an international shrimp trader. A food...Ch. 3 - Prob. 3PCh. 3 - Prob. 4PCh. 3 - You have decided to take your daughter skiing in...Ch. 3 - Suppose the risk-free interest rate is 4%. a....Ch. 3 - You have an investment opportunity in Japan. It...Ch. 3 - Your firm has a risk-free investment opportunity...Ch. 3 - You run a construction firm. You have just won a...Ch. 3 - Your firm has identified three potential...Ch. 3 - Your computer manufacturing firm must purchase...Ch. 3 - Prob. 12PCh. 3 - Prob. 13PCh. 3 - An American Depositary Receipt (ADR) is security...Ch. 3 - Prob. 15PCh. 3 - An Exchange-Traded Fund (ETF) is a security that...Ch. 3 - Consider two securities that pay risk-free cash...Ch. 3 - Prob. 18P
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