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Consider an economy in which there are two dates t=0 and t=1, and two possible states, i=1 and i=2, at t=1, which occur with equal
Consider an economy in which there are two dates t=0 and t=1, and two possible states, i=1 and i=2, at t=1, which occur with equal probability, so that 1=2=1/2. In this economy, two "complex" assets are traded. The first sells for price P10=2 at t=0 and makes payoffs of Z11=2 in state i=1 at t=1 and Z12=4 in state i=2 at t=1. The second sells for P20=1.25 at t=0 and makes payoffs Z21=1 in state i=1 at t=1 and Z22=3 in state i=2 at t=1. a. Use this information to compute the price q1 at t=0 of a contingent claim that pays off one in state i=1 at t=1 and zero in state i=2 at t=1 and the price q2 at t=0 of a contingent claim that pays off zero in state i=1 at t=1 and one in state i=2 at t=1. b. Use your answers from part (a), above, to compute the price Pb0 at t=0 of a bond that pays off Zb1=1 in state i=1 at t=1 and Zb2=1 in state i=2 at t=1. c. Use your answers from part (a), above, to compute the price Ps0 at t=0 of a share of stock that makes no dividend payments, but can be sold for Ps1=2 in state i=1 at t=1 and Ps2=3 in state i=2 at t=1
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