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:

Founder

An individual who establishes and initiates something, such as a business, organization, or institution.

Marsha Linehan

An American psychologist known for developing Dialectical Behavior Therapy (DBT), which is used to treat borderline personality disorder and other mental health disorders.

Expanded Behavior Therapy

A broad approach to behavioral therapy that incorporates cognitive, affective, and physiological techniques.

Mindfulness-Based Cognitive Therapy

Mindfulness-Based Cognitive Therapy (MBCT) combines cognitive behavioral techniques with mindfulness strategies to help people better understand and manage their thoughts and emotions to reduce mental distress.