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3. (4 marks) Consider the following 3-by-3 Arrow-Debreu model: two assets Si(t), i=1,2, three states, j,j=1,,3, representing the price of the underlyings in t=1 year,
3. (4 marks) Consider the following 3-by-3 Arrow-Debreu model: two assets Si(t), i=1,2, three states, j,j=1,,3, representing the price of the underlyings in t=1 year, first row is a cash account with r=0. D=er63er84era6 With a>0. The current value of the stocks is S1(0)=$8,S2(0)=$4. a) (2 marks) Assume a=10, compute the price today of an option with payoff at t=1:(S1(1)S2(1)3)+(a spread option). b) (2 marks) Assume a=12, is the payoff Y(1,1)=4,Y(1,2)=6,Y(1,3)=10 attainable? Explain. 3. (4 marks) Consider the following 3-by-3 Arrow-Debreu model: two assets Si(t), i=1,2, three states, j,j=1,,3, representing the price of the underlyings in t=1 year, first row is a cash account with r=0. D=er63er84era6 With a>0. The current value of the stocks is S1(0)=$8,S2(0)=$4. a) (2 marks) Assume a=10, compute the price today of an option with payoff at t=1:(S1(1)S2(1)3)+(a spread option). b) (2 marks) Assume a=12, is the payoff Y(1,1)=4,Y(1,2)=6,Y(1,3)=10 attainable? Explain
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