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GuDViN [60]
3 years ago
14

The yield to maturity (YTM) on 1-year zero-coupon bonds is 7% and the YTM on 2-year zeros is 8%. The yield to maturity on 2-year

-maturity coupon bonds with coupon rates of 14% (paid annually) is 7.9%. a. What arbitrage opportunity is available for an investment banking firm? The arbitrage strategy is to buy zeros with face values of $ 140 and $ 1140 , and respective maturities of one year and two years. b. What is the profit on the activity? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Business
1 answer:
Vikentia [17]3 years ago
7 0

Answer:

(a) The arbitrage strategy is to buy zeros with face values of $140 and $1,140 and respective maturities of one and two years, and simultaneously sell the coupon bond.

(b) The profit on the activity equals $0.72 on each bond.

Explanation:

The price of the coupon bond = 140 × PV(7.9%, 2) + 1000 × PV(7.9%, 2)

= 140 × (1-(1/1.079)^2)/0.079 + 1,000/1.079^2

= $1,108.93

If the coupons were withdrawn and sold as zeros individually, then the coupon payments could be sold separately on the basis of the zero maturity yield for maturities of one and two years.

[140/1.07] + [1,140/1.08^2] = $1,108.21.

The arbitrage strategy is to buy zeros with face values of $140 and $1,140 and respective maturities of one and two years, and simultaneously sell the coupon bond.

The profit on the activity equals $0.72 on each bond.

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Answer:

With specialization Iran will be able to consume 1.7 bottles of olive oil.

Explanation:

Iran produces 4 barrels of oil and 6 bottles of olive oil.

Iraq produces 4 barrels of oil and 4 bottles of olive oil.

The opportunity cost of producing a barrel of oil for Iran

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The opportunity cost of producing a barrel of oil for Iraq

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Iraq has a lower opportunity cost for producing oil so we can say it has a comparative advantage in producing oil.

The opportunity cost of producing a barrel of olive oil for Iran

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= 0.66

The opportunity cost of producing a barrel of olive oil for Iraq

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= 1

Iran has a lower opportunity cost for producing olive oil so we can say it has a comparative advantage in producing it.

The terms of trade with specialization are 4 barrels of oil for 4.3 bottles of olive oil, and that 4 barrels of oil are indeed traded for 4.3 bottles of olive oil.

Without trade, Iran is consuming 4 barrels of oil and 6 bottles of olive oil.

With specialization, Iran will be able to consume

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= 1.7 bottles of olive oil

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3 years ago
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Korvikt [17]

Answer:

C. the payoffs are dependent upon another​ variable, such as revenue or profit.

Explanation:

Contingent contracts are one of the types of contracts in which the promisor offers the responsibility only when the distinct conditions are satisfied. It works on the occurrence or non-occurance of the specific event. It relies on the happening of an unpredictable event. The contingent contract becomes void in the case when the happening of the event grows impossible.

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