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Unformatted text preview: buy 1GA for 0.75BA Dealer III: sell 1PA for 2BA buy 1PA for 1.5BA. Are there arbitrage opportunities now? Explain. 4. Suppose there are no dealers, but now instead, an apple tree ﬁrm oﬀers for sale a bond and stock. An apple tree produces 70GA and 45BA. The bond pays 20GA and 20BA. The stock pays 50GA and 25BA. The price of the bond is 18PA, and the price of the stock is 30PA. (i) Find the arbitrage-free price of the atomic securities (i.e., a security that pays 1GA, and another security that pays 1BA). (ii) Calculate the arbitrage-free price of an apple tree. (iii) Construct a proﬁtable arbitrage strategy if the price of an apple tree is lower than its arbitrage-free level. (iv) Calculate the discount factor and explain its economic interpretation. (v) An investor wants a security that will pay 80GA and 100BA. Construct such a security and determine its arbitrage-free price. Note: • Do not submit this tutorial assignment, since it will not be marked. 1...
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This note was uploaded on 07/13/2011 for the course ECON 3107 at University of New South Wales.