(20 pts) Let N = - {W1, W2, W3} and T = 1 (time to maturity). Consider the market with two risky stocks and one risk-free bond. Suppose the risk-free return R= 0.25, and the initial values of the stocks are given by Si(0) = 1, S2(0) = 1. Moreover = Scenario Si(1) S2(1) 0.5 0.5 W2 2 1.5 W3 0.5 1.5 (1) (10 pts) Is the market arbitrage free? Justify your answer by finding the risk-neutral probabilities. (2) (10 pts) Consider now a European contingent claim (derivative) with final payoff H(wi) = 5, H(w2) = 10, H(W3) = 12.5. If the price of this claim is unique, find the unique initial price H(0). If the price is not unique, find the price range/interval for H(0) of this contingent claim. = = = (20 pts) Let N = - {W1, W2, W3} and T = 1 (time to maturity). Consider the market with two risky stocks and one risk-free bond. Suppose the risk-free return R= 0.25, and the initial values of the stocks are given by Si(0) = 1, S2(0) = 1. Moreover = Scenario Si(1) S2(1) 0.5 0.5 W2 2 1.5 W3 0.5 1.5 (1) (10 pts) Is the market arbitrage free? Justify your answer by finding the risk-neutral probabilities. (2) (10 pts) Consider now a European contingent claim (derivative) with final payoff H(wi) = 5, H(w2) = 10, H(W3) = 12.5. If the price of this claim is unique, find the unique initial price H(0). If the price is not unique, find the price range/interval for H(0) of this contingent claim. = = =