Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 1. Consider a market with three assets and three states of the world. At time t=0 we have that 8= 1,57 = 3,86 and

image text in transcribed

Problem 1. Consider a market with three assets and three states of the world. At time t=0 we have that 8= 1,57 = 3,86 and at time t = T we have that 4 Se = (1,1,1), S1 = (1,0,10), S = (0,0,8) (a) (12 points) Find the payoff-matrix of S and the set of risk-neutral probabilities M(S). (b) (4 points) Is the market arbitrage-free?Is the market complete? (c) (7 points) A call option with exercise price K = 2 is written on the primary asset S! Find a replicating portfolio. (d) (4 points) Find an arbitrage-free price for the call option of question (c). Problem 1. Consider a market with three assets and three states of the world. At time t=0 we have that 8= 1,57 = 3,86 and at time t = T we have that 4 Se = (1,1,1), S1 = (1,0,10), S = (0,0,8) (a) (12 points) Find the payoff-matrix of S and the set of risk-neutral probabilities M(S). (b) (4 points) Is the market arbitrage-free?Is the market complete? (c) (7 points) A call option with exercise price K = 2 is written on the primary asset S! Find a replicating portfolio. (d) (4 points) Find an arbitrage-free price for the call option of question (c)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Comparative Public Budgeting

Authors: George M Guess

2nd Edition

1316648109, 978-1316648100

More Books

Students also viewed these Finance questions