= Consider the following discrete time two-period market model. The savings account is given by t...
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= Consider the following discrete time two-period market model. The savings account is given by t ₁5₂ 5₁5₂ where and are 51 ßt for t= 0, 1, 2. The stock price is given by So = 1 and S₁ = ₁ and S₂ = independent random variables, each taking two possibilities values u and d with positive probabilities. Moreover, assume that 0 < d < ß < u . Consider a contract which pays H₂ = S₂/S² at time 2. a) Find H₁, the time 1 price of the contract. b) Hence or otherwise, prove that the time 0 of price of this contract is given by u + d В Ho c) Find the replicating portfolio for this contract = udp = Consider the following discrete time two-period market model. The savings account is given by t ₁5₂ 5₁5₂ where and are 51 ßt for t= 0, 1, 2. The stock price is given by So = 1 and S₁ = ₁ and S₂ = independent random variables, each taking two possibilities values u and d with positive probabilities. Moreover, assume that 0 < d < ß < u . Consider a contract which pays H₂ = S₂/S² at time 2. a) Find H₁, the time 1 price of the contract. b) Hence or otherwise, prove that the time 0 of price of this contract is given by u + d В Ho c) Find the replicating portfolio for this contract = udp = Consider the following discrete time two-period market model. The savings account is given by t ₁5₂ 5₁5₂ where and are 51 ßt for t= 0, 1, 2. The stock price is given by So = 1 and S₁ = ₁ and S₂ = independent random variables, each taking two possibilities values u and d with positive probabilities. Moreover, assume that 0 < d < ß < u . Consider a contract which pays H₂ = S₂/S² at time 2. a) Find H₁, the time 1 price of the contract. b) Hence or otherwise, prove that the time 0 of price of this contract is given by u + d В Ho c) Find the replicating portfolio for this contract = udp = Consider the following discrete time two-period market model. The savings account is given by t ₁5₂ 5₁5₂ where and are 51 ßt for t= 0, 1, 2. The stock price is given by So = 1 and S₁ = ₁ and S₂ = independent random variables, each taking two possibilities values u and d with positive probabilities. Moreover, assume that 0 < d < ß < u . Consider a contract which pays H₂ = S₂/S² at time 2. a) Find H₁, the time 1 price of the contract. b) Hence or otherwise, prove that the time 0 of price of this contract is given by u + d В Ho c) Find the replicating portfolio for this contract = udp
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a To find the time 1 price of the contract we need to find the expected value of H2 discounted back ... View the full answer
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