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Unformatted text preview: Suppose that the world cup soccer nal is 1 year from today (although this is not true), and suppose that RAIN is trading at a price of $23 and SUN is trading at a price of $70. (a) If you buy 1 share of RAIN and 1 share of SUN, what is your payo after 1 year, depending on the weather? (b) What does the No-Arbitrage Condition imply about the price of a 1-year zero-coupon bond? (Assume no trading costs.) (c) Suppose that a 1-year zero-coupon bond is trading at $90. Show how you would set up a transaction to earn a riskless arbitrage prot. (Assume no trading costs.) (d) Suppose that trading zero-coupon bonds is costless, but trading RAIN and SUN each cost $2 per $100 face value. Can you still make an arbitrage prot?...
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This note was uploaded on 12/04/2011 for the course ECON 106v taught by Professor Miyakawa during the Spring '08 term at UCLA.
- Spring '08