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Suppose we have the following two assets available in the market State Riskless Asset Risky Asset Up 1 3 Down 1 2 The date 0
Suppose we have the following two assets available in the market
State | Riskless Asset | Risky Asset |
Up | 1 | 3 |
Down | 1 | 2 |
The date 0 market price is 0,8 for the Riskless Asset and 2,1 for the Risky Asset
a) Synthesize the two simple assets. (To synthesixe the "Up-asset", find a portfolio of the Risky Asset and Riskless Asset that has a value of 1 in the Up-state and 0 in the Down-state.Next, find a portfolio that synthesizes the Down-Asset; 0 in the Up-state and 1 in the Down-state.
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