What Steps Would You Follow in Order to Take Advantage

question 7

Essay

What steps would you follow in order to take advantage of the following arbitrage opportunity (if there is one)? Security A costs $100 and pays $120 in 3 years. Security B costs $100 and pays $110 in one year. Your friend tells you that he would like you to lend him $110 in a year and that he would give $130 the following year. Finally you know that in two years, with $130, you can invest in a security that will pay you either $140 or $121 (with equal probability) after a year. 2

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Definitions:

Korean War

A conflict between North Korea, assisted by China and the Soviet Union, and South Korea, supported by the United Nations primarily led by the United States, from 1950 to 1953, which ended in an armistice.

Civil Rights Legislation

Laws and regulations enacted to protect and guarantee the basic rights and freedoms of individuals, especially regarding equality and justice.

Joseph McCarthy

A U.S. senator known for his anti-communist sentiments and the subsequent fear and political repression he inspired during the early 1950s, a period often referred to as McCarthyism.

Dixiecrats

A political party in the United States, formally known as the States' Rights Democratic Party, which split from the Democratic Party in 1948 in opposition to its policy of extending civil rights.