Question

Consider the securities shown here that are trading at their respective market prices. The two securities...

Consider the securities shown here that are trading at their respective market prices. The two securities pay risk-free cash flows over the next two years.

Market Prices

CF in one year

CF in two years

Security A

$857

900

0

Security B

$181

0

200

Suppose that a security C has cash flows of: 450 in one year and 200 in 2 years and it is trading for a price of $611. What arbitrage opportunity is available?

Buy 2 C; Sell 1 A; and Sell 2 B

Sell 2 C; Buy 1 A; and Buy 4 B

Sell 2 C; Buy 1 A; and Buy 2 B

Buy C; Sell 2 A; and Sell 4 B
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