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Consider a two - period securities market model, with two risky securities S 1 , S 2 . The dynamics of the price processes (
Consider a twoperiod securities market model, with two risky securities The dynamics of the price processes are shown in the tree below.
In addition, there is a riskless bank account The discretely compounded interest rate
which governs the dynamics of is constant.
a Show that the model is indeed arbitragefree by finding an EMM for this model.
b Is this model complete? Why or why not?
c Consider a chooser option X on S which allows the holder to decide, at time t whether the option is a call on S with strike K and maturity T or a put with strike K and maturity T What are the t and t prices of this option?
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