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Question3 Consider a static economy with three state of natures and three securities. The payoff of the securities is A(100, 75,60), B(80, 125,60), C(100, 50,

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Question3 Consider a static economy with three state of natures and three securities. The payoff of the securities is A(100, 75,60), B(80, 125,60), C(100, 50, 150) and it is delivered one year from now. The shares are traded in a competitive market today and their equilibrium price is PA = 70, PB = 75, Pc = 110 1. Arrow-Debreu securities for each of the three states of the world are traded in perfectly competitive markets today. Let 01, 02, and 43 denote their respective prices. Express the equilibrium price of each primitivesecurity (A,B and C) in terms of the equilibrium prices of the Arrow-Debreu securities. Hence find the equilibrium prices of the Arrow- Debreu securities. 2. Find the risk free rate between now and one year. 3. Find the linear combination of the primitive securities A,B and C that will replicate one Arrow-Debreu security for the state 1. Use this as an alternative way of finding the equilibrium price of that security, and verify that you get the same answer as you did in part (1) 4. Define a new asset, a call option stock C with a strike price of $90. This is defined as a contract that gives you the right, but not the obligation, to buy one share of C for $90 in a year's time, after the uncertainty gets resolved and you know which of the three states of the world has come about. Find the price of this new asset in today's market. Question3 Consider a static economy with three state of natures and three securities. The payoff of the securities is A(100, 75,60), B(80, 125,60), C(100, 50, 150) and it is delivered one year from now. The shares are traded in a competitive market today and their equilibrium price is PA = 70, PB = 75, Pc = 110 1. Arrow-Debreu securities for each of the three states of the world are traded in perfectly competitive markets today. Let 01, 02, and 43 denote their respective prices. Express the equilibrium price of each primitivesecurity (A,B and C) in terms of the equilibrium prices of the Arrow-Debreu securities. Hence find the equilibrium prices of the Arrow- Debreu securities. 2. Find the risk free rate between now and one year. 3. Find the linear combination of the primitive securities A,B and C that will replicate one Arrow-Debreu security for the state 1. Use this as an alternative way of finding the equilibrium price of that security, and verify that you get the same answer as you did in part (1) 4. Define a new asset, a call option stock C with a strike price of $90. This is defined as a contract that gives you the right, but not the obligation, to buy one share of C for $90 in a year's time, after the uncertainty gets resolved and you know which of the three states of the world has come about. Find the price of this new asset in today's market

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