In a financial market, the following three securities are
traded:
- Regular Annuity: Maturity = 5 years, Annual payments in arrears
= $28.000, Current price = $125.450. - Regular coupon bond: Maturity = 5 years, Face value =
$1,000.000, Coupon rate = 7.000%, Current price = $965.405. - Zero-coupon bond: Maturity = 5 years, Face value = $500.000,
Current price = $450.340.
Assuming that an arbitrager can buy/(short) sell the
fraction quantities of the above securities. What
will be the arbitrage strategy at t=0 which results in positive
cash flow of $2.00 at t=0 and zero outflows at t=1, t=2, t=3, t=4,
and t=5?
S1) [“Sell”, “Buy”] [“1”, “2”, “1/2”, “3/2”, “5”, “6”, “10”]
quantity of Regular Annuity; and
S2) [“Sell”, “Buy”] [“1”, “2”, “3”, “4”, “5”, “6”, “10”]
quantity of Regular
Coupon Bond; and
S3) [“Sell”, “Buy”] [“1”, “2”, “3”, “1/2”, “4”, “6”, “10”]
quantity of Zero-Coupon
Bond.
