Business, 05.07.2020 14:01 MadisonBoone

Consider the following two securities: RAIN and SUN. RAIN pays $100 if it rains on NYU graduation day. SUN pays $100 if there is no rain. Suppose that RAIN is trading at a price of $27 and SUN is trading at a price of $70.Required:a. If you buy 1 share of RAIN and 1 share of SUN, what is your payoff after 1 year, depending on the weather?b. What does the No-Arbitrage Condition imply about the price of a 1-year zerocoupon bond? (Assume no trading costs.)c. Suppose that a 1-year zero-coupon bond is trading at $90. Show how you would set up a transaction to earn a riskless arbitrage profit. (Assume no trading costs.) (d) Suppose that trading zero-coupon bonds is costless, but trading RAIN and SUN each cost $2 per $100 face value. Can you still make an arbitrage profit?

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Consider the following two securities: RAIN and SUN. RAIN pays $100 if it rains on NYU graduation da...

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