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A market has two stocks S and S2. Both Si and S2 are valued at $1 per unit today and can be worth either $2
A market has two stocks S and S2. Both Si and S2 are valued at $1 per unit today and can be worth either $2 or $0.5 per unit after one year. Assume that money M valued at S1 per unit today does not change its value during that time. (a) (4 pts) Suppose a convertible bond B that pays either S2 when Si $2 or $1 when S1 - S0.5 in a year is also traded in the market (i) Calculate the portfolio {Si, M) that replicates B using matrix inverses (ii) Calculate the price of convertible bond B (b) (4 pts) Suppose an option 01 that pays 81 when both S S2 S2 (and 0 otherwise) is traded in the market and is worth S0.125. Also suppose option O2 that pays S1 when S1 - S2 but S2 - S0.5 (and 0 otherwise) is traded in the market as well (i) Calculate the portfolio {S,S2, M,O} that replicates 02 using row reduction. ii) Calculate the price of option O, A market has two stocks S and S2. Both Si and S2 are valued at $1 per unit today and can be worth either $2 or $0.5 per unit after one year. Assume that money M valued at S1 per unit today does not change its value during that time. (a) (4 pts) Suppose a convertible bond B that pays either S2 when Si $2 or $1 when S1 - S0.5 in a year is also traded in the market (i) Calculate the portfolio {Si, M) that replicates B using matrix inverses (ii) Calculate the price of convertible bond B (b) (4 pts) Suppose an option 01 that pays 81 when both S S2 S2 (and 0 otherwise) is traded in the market and is worth S0.125. Also suppose option O2 that pays S1 when S1 - S2 but S2 - S0.5 (and 0 otherwise) is traded in the market as well (i) Calculate the portfolio {S,S2, M,O} that replicates 02 using row reduction. ii) Calculate the price of option O
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