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b. A call option with exercise price X on an asset pays max(a, - X, 0) in state s, where a, is the asset payoff
b. A call option with exercise price X on an asset pays max(a, - X, 0) in state s, where a, is the asset payoff in state s. Suppose that only asset A exists in this market (not B or C), but that call options on asset A may also be bought or sold with any desired nonnegative exercise price X. Show how to synthetically construct the Arrow-Debreu securities, as well as the risk-free asset. Let C6 refers to call with X=6 AD3: C6 is AD3 AD2: C4 - 3C6 is AD2 ADI: C1-4AD2-6AD3 is ADI (also C1-4C4+6C6) RF is C6+C4-3C6+ C1-4C4+606=C1-304+3C6
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