1. (10 marks) Consider a oble-period model (a period is one year) formed by a boud paying a risk-free rate of 4% per year, and by Stocks 1 and 2 with initial prices x = 7.8 and s= 7, respectively, and S: (4') = 18, 57(4) = 15, 5 (-3) = 3 and 99 (w) = 10, 54(-2) = 8,57(43) = 6, withi probabilities (w), P(wy). Py) >0 and P(W) + Play) + P(w3) = 1. (a) (10 marks) is the market free of arbitrage? (You need to give your ronson) (b) (10 marks) is the market complete? (You need to give your reason.) (c) (10 marks) Consider a contingent claim X with contract function X = (SS) = max S-S cox {w, $4752-1} Find a fair price for X at time 0, i.e., 110:X). (d) (10 marks) Find a replicating portfolio for X defined in (c). 1. (10 marks) Consider a oble-period model (a period is one year) formed by a boud paying a risk-free rate of 4% per year, and by Stocks 1 and 2 with initial prices x = 7.8 and s= 7, respectively, and S: (4') = 18, 57(4) = 15, 5 (-3) = 3 and 99 (w) = 10, 54(-2) = 8,57(43) = 6, withi probabilities (w), P(wy). Py) >0 and P(W) + Play) + P(w3) = 1. (a) (10 marks) is the market free of arbitrage? (You need to give your ronson) (b) (10 marks) is the market complete? (You need to give your reason.) (c) (10 marks) Consider a contingent claim X with contract function X = (SS) = max S-S cox {w, $4752-1} Find a fair price for X at time 0, i.e., 110:X). (d) (10 marks) Find a replicating portfolio for X defined in (c)