1. Recall the two-scenario situation in class. A brief recap: at t=0 we construct a portfolio consisting of y0 amount of cash and y1 units of an asset where the unit price is s (or s(0)). At time t= the cash has grown to ery0 and the unit price of the asset is either F1 (scenario 1)or F2 (scenario 2), with F2>F1. Scenario 1 occurs with probability p1>0 and scenario 2 occurs with probability p2>0. This probability distribution is called risk-neutral if the present value of the expected value at time t= is equal to s. Show that a risk-neutral probability distribution exists if and only if p1=F2F1F2erts,p2=F2F1ertsF1. 2. In the situation of the previous problem, assume that F1,F2>erts. In this case there is no risk-neutral probability distribution. The arbitrage theorem says that in this case there is arbitrage. Describe the arbitrage