1. A. You are researching a one period, strike 12 European call. The market price for this derivative security is 5 at time 0. Determine whether or not there is arbitrage in this situation, and if so build a portfolio (potentially containing stock, risk-free asset, and the aforementioned call, in either long or short positions) to extract the arbitrage. The given parameters below have their usual meaning. 2 1 So = 16, r=a 4 - d U = 2 = 1 2 = = a 2. A. In the one-period model with () 0 and X:(T) > 0 then it must be the case that X) > 0. 3. A. A (European-style) security in the three-period model has payoff V3 = (S0+S,+S2+S3)/4 at time 3. Assuming that the no-arbitrage assumption holds, show that the amount of stock in the replicating portfolio depends only on time and not on the values of the coin flips. Describe in words what has to happen for you to manage this portfolio as time proceeds. 1. A. You are researching a one period, strike 12 European call. The market price for this derivative security is 5 at time 0. Determine whether or not there is arbitrage in this situation, and if so build a portfolio (potentially containing stock, risk-free asset, and the aforementioned call, in either long or short positions) to extract the arbitrage. The given parameters below have their usual meaning. 2 1 So = 16, r=a 4 - d U = 2 = 1 2 = = a 2. A. In the one-period model with () 0 and X:(T) > 0 then it must be the case that X) > 0. 3. A. A (European-style) security in the three-period model has payoff V3 = (S0+S,+S2+S3)/4 at time 3. Assuming that the no-arbitrage assumption holds, show that the amount of stock in the replicating portfolio depends only on time and not on the values of the coin flips. Describe in words what has to happen for you to manage this portfolio as time proceeds