Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Question
Chapter 3, Problem 15P
Summary Introduction
To determine: No-arbitrage price of securities before the first cash flow is paid.
Introduction:
Arbitrage pricing theory is an asset-pricing model. No arbitrage is under arbitrage-free condition. Under this situation, all the assets are priced appropriately and there are no chances of one’s gain to overcome the market gains without facing any risks.
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The promised cash flows of three securities are listed below. If the cash flows are risk-free, and the risk-free interest rate is 5.0%, determine the no-arbitrage price of each security before the first cash flow is paid.
Security
Cash Flow Today ($)
Cash Flow in One Year ($)
A
800
800
B
0
1600
C
1,600
0
The no-arbitrage price of security A is how much? ? (Round to the nearest cent.)
The no-arbitrage price of security B is how much? ? (Round to the nearest cent.)
The no-arbitrage price of security C is how much? ? (Round to the nearest cent.)
The promised cash flows of three securities are listed below. If the cash flows are risk-free, and the risk-free interest
rate is 4.5%, determine the no-arbitrage price of each security before the first cash flow is paid. (Click on the following
icon in order to copy its contents into a spreadsheet.)
Security
A
B
C
Cash Flow Today (S)
700
0
1,400
The no-arbitrage price of security A is S
Cash Flow in One Year ($)
700
1,400
0
(Round to the nearest cent.)
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
B1 $192 $200 0
B2 $176 0 $200
What is the no-arbitrage price of a security that pays cash flows of $200 in one year and $200 in two years?
What is the no-arbitrage price of a security that pays cash flows of $200 in one year and $1600 in two years?
Suppose a security with cash flows of $100 in one year and $200 in two years is trading for a price of $260. What arbitrage opportunity is available?
Chapter 3 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
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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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