Question
Assume an economy with 3 states at date-1. The market is complete. Risk-free rate of return on the bond is R = 10%. Price of
Assume an economy with 3 states at date-1. The market is complete. Risk-free rate of return on the bond is R = 10%. Price of Arrow-Debreu security for state 1 is AD1(0) = $0.4, price of Arrow-Debreu security for state 2 is AD2(0) = $0.3. Answer the following questions:
(1) What is the price of AD security for state 3, AD3(0)?
(2) What is the risk-neutral probability of this economy? Answer the question by calculating risk-neutral probabilities in all states, q1, q2, q3.
(3) CFs of a claim at date-1 are (2, 1, 0.5). What is the price of this claim?
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