Consider the same economy described in part (ii) of Exercise 4.15. Show that the Law of One Price holds (but, as shown in Exercise 4.15, there are arbitrage opportunities of the first kind).

Data From Exercise 4.15

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Exercise 4.15 (i) Consider an economy with two possible states of the world and two securities (i.e., S = N = 2), with 32 D = and p = -3-2 (9). Show that there exists an arbitrage opportunity of the second kind but there are no arbitrage opportunities of the first kind. (ii) Consider an economy with two possible states of the world and two securities (i.e., S = N = 2), with D = =[] 32 and p = =(). Show that there exists an arbitrage opportunity of the first kind but there are no arbitrage opportunities of the second kind. (iii) Show that, if there exists a portfolio such that Dz> 0 with p > 0, then the existence of an arbitrage opportunity of the second kind implies the existence of an arbitrage opportunity of the first kind.