1. Consider a one-period model with 2 states and 2 assets: a bond and a stock. Assume that r = 0 so that the bond sells for $1 at t = 0 and paid $1 at t = 1. The initial stock price is $20 and it has two possible prices $30 and $15 at t = 1.

(a). Is this model arbitrage free? If yes, find a state price vector and a risk neutral probability measure. Is it complete?

(b). Find the prices of the European call and put options on the stock with strike price K = $20. Also find the replicating trading strategies which replicate the cash flows for the options at t = 1 (as we did in class).

Please answer ASAP with full solutions and explanations!!!

1. Consider a one-period model with 2 states and 2 assets: a bond and a stock. Assume that r=0 so that the bond sells for $1 at t=0 and paid $1 at t=1. The initial stock price is $20 and it has two possible prices $30 and $15 at t=1. (1). Is this model arbitrage free? If yes, find a state price vector and a risk neutral probability measure. Is it complete? (2). Find the prices of the European call and put options on the stock with strike price K=$20. Also find the replicating trading strategies which replicate the cash flows for the options at t=1 (as we did in class). 1. Consider a one-period model with 2 states and 2 assets: a bond and a stock. Assume that r=0 so that the bond sells for $1 at t=0 and paid $1 at t=1. The initial stock price is $20 and it has two possible prices $30 and $15 at t=1. (1). Is this model arbitrage free? If yes, find a state price vector and a risk neutral probability measure. Is it complete? (2). Find the prices of the European call and put options on the stock with strike price K=$20. Also find the replicating trading strategies which replicate the cash flows for the options at t=1 (as we did in class)