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1. Consider a general one-period asset pricing model with the following information: := {11, 12, 13} S(0) 5, S2(0) = 10, r = 0.2.
1. Consider a general one-period asset pricing model with the following information: := {11, 12, 13} S(0) 5, S2(0) = 10, r = 0.2. S(1, 1) = 2, S(1, w) = 6, S(1, 3) = 7. S2(1, 1) = 6, S2(1, 2) = 8, S2(1, 3) = 15. 1) If derivative X with time 1 payoff X(1, w;) = S(1, w;) - S(1, w;), w; Q, compute the price of X at time 0 with the risk-free asset and the two risky assets S1 and S2. 2) Is the market arbitrage free? Is the market complete? 1. Consider a general one-period asset pricing model with the following information: = {w1, w, W3} S(0) 5, S2(0) = 10, r = 0.2. S(1, w) = 2, S(1, 2) = 6, S(1, 3) = 7. S(1, 1) = 6, S(1, 2) = 8, S2(1, 3) = 15. 1) If derivative X with time 1 payoff X(1, w;) = S(1, w;) S(1, w;), w; Q, compute the price of X at time 0 with the risk-free asset and the two risky assets S1 and S2. 2) Is the market arbitrage free? Is the market complete? Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting 0.8634/$ and Credit Suisse is offering CHF 0.9580/$. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current /CHF quote of 0.8830/CHF. Assume you have $5,000,000 with which you intend to conduct an arbitrage trade. What is the sequence of your orders and what is the arbitrage profit that you'll realize given these quotes? a. Buy Swiss francs from Credit Suisse, then buy euros from UBS, then buy dollars from Dresdner Bank. The arbitrage profit is equal to USD 101,262. b. Buy euros from Dresdner Bank, then buy Swiss francs from UBS, then buy dollars from Credit Suisse. The arbitrage profit is equal to USD 103,356. c. Buy Swiss francs from Credit Suisse, then buy euros from UBS, then buy dollars from Dresdner Bank. The arbitrage profit is equal to USD 337,688. d. Buy euros from Dresdner Bank, then buy Swiss francs from UBS, then buy dollars from Credit Suisse. The arbitrage profit is equal to USD 1,845,919.
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