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Discuss market completeness in the context of Arrow-Debreu pricing and risk-neutral probability. (b) Consider an economy with three stocks and four states. The payoff structure
Discuss market completeness in the context of Arrow-Debreu pricing and risk-neutral probability. (b) Consider an economy with three stocks and four states. The payoff structure can be summarized in the table below. Could you introduce a put option on Stock A with exercise price 1 to complete the market? (c) Suppose that c_1, c_2 and c_3 are the prices of three European call options with strike prices X_1, X_2 and X_3, respectively, where X_3 > X_2 > X_1 and X_3 = X_2 = X_2 = X_1. All options are written on the same asset and have the same maturity. Under the no arbitrage condition, show that C_2
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