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Unformatted text preview: 2 . Therefore, we can always have positive payoﬀ, it is a arbitrage strategy. Question 3 (a) w A = σ 2 B-σ AB σ 2 A-2 σ AB + σ 2 B = 0 . 62 , w B = 1-w A = 0 . 38 . 1 (b) w A = r-r B r A-r B = 1 . 67 , w B = 1-w A =-. 67 . (c) β A = σ AM σ 2 M = 0 . 2 , β B = σ BM σ 2 M = 0 . 5 . Then from CAPM, we have r A-r f = β A ( r M-r f ) r B-r f = β B ( r M-r f ) Therefore, r f = 0 . 1, r m = 0 . 2. Question 3 (a) FALSE. The security with beta of 0 is the risk-free asset, which still has pos-itive return. (b) TRUE. Since F = S (1 + r f ) T , and r f > 0. (c) TRUE. If put-call parity is not satisﬁed, we can construct arbitrage strategy (need to explain in more details). 2...
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- Spring '08
- Derivative, Strike price, arbitrage strategy