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solution

Which of the following statements is inconsistent with the notion that there are no arbitrage opportunities? Select one:

i) Investment strategy A always generates the same future payoff as investment strategy B. It follows that the current price to enter A must be identical to the current price to enter B.
ii) The future payoff to an investment strategy is known today with complete certainty. Therefore, the spot price to enter this strategy today will be such that whoever enters today will earn the riskfree rate of interest over the investment horizon.
iii) Investment strategy A is very safe. No matters what happens, it will generate a guaranteed payoff at time T of $100. In contrast, the future payoff to investment strategy B is highly uncertain — it could be high or low. Nevertheless, strategy B has an expected payoff is $100. Since A and B both have expected payoffs of $100, the cost to enter both strategies today must also be identical.
iv) An investment product is structured such that its payoff at future time T is guaranteed to be $0. It follows that the current price to enter this strategy must also be $0.
v) All of the above statements are consistent with the notion that there are no arbitrage opportunities.

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