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Exercise Consider a one-period model with only two possible end-of-period states. Three assets are traded in an arbitrage-free market. Asset 1 is a risk-free asset
Exercise Consider a one-period model with only two possible end-of-period states. Three assets are traded in an arbitrage-free market. Asset 1 is a risk-free asset with a price of 1 and an end-of-period payoff of R', the risk-free gross rate of return, in either state. Asset 2 has a price of S and offers a payoff of uS in state 1 (good state) and dS in state 2 (bad state), where u > d. 1. Show that if the inequality d b max(a, b) = { b. if a d. 1. Show that if the inequality d b max(a, b) = { b. if a d. 1. Show that if the inequality d b max(a, b) = { b. if a d. 1. Show that if the inequality d b max(a, b) = { b. if a
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