Question
In a one-period financial market the following securities are available for trade, the risk-free asset, yielding r= 8%; a risky security, , with time zero
In a one-period financial market the following securities are available for trade, the risk-free asset, yielding r= 8%; a risky security, , with time zero price (0)= 9.0740 and payoff at time given by: (1)()= 12, (1)()= 8, (1)()= 10.
1. State whether the market is complete and arbitrage-free.
2. Suppose that a new security is introduced in the market, namely a forward contract on , requiring the long position to buy at time t=1 at a delivery price specified at time t=0. Is the new security, denoted by , redundant? Does it complete the market?
3. If the delivery price is = 9, state whether the market gives rise to violations of the Law of One Price.
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