In: Accounting
The following table shows prices of three shares that would prevail under three economic scenarios.
stock A B C
Recession A=12,B=8,C=9
Normal A=7,B=13,C=9
BOOM A=15,B=5,C=9
If all of these stocks cost $8 today. Perform necessary calculations to check if there are any arbitrage opportunities.
There is an arbitrage opportunity if you can buy a stock for less than its intrinsic value and sell it for more.
For example, in the recession scenario, Stock A is selling for $12, but its intrinsic value is $7.
This means that you can buy Stock A for $12 and sell it immediately for $7, resulting in a profit of $5.In the BOOM scenario, Stock B is selling for $5, but its intrinsic value is $13. This means that you can buy Stock B for $5 and sell it immediately for $13, resulting in a profit of $8.
$8