Given the discounted terminal payoff matrix and the current price vectorS (0) = (134). (a) By

Question:

Given the discounted terminal payoff matrix

1 3*(1; 2) = | 1 1 3 5 24 1 3.

and the current price vector Ŝ^∗(0) = (134).

(a) By presenting a counter example, show that the law of one price does not hold for this one-period securities model.

(b) How can we modify the current price vector such that the law of one price holds under the modified model?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For answer-question

Mathematical Models Of Financial Derivative

ISBN: 9783642447938

2nd Edition

Authors: Yue-Kuen Kwok

See More Books

Question Posted: Dec 02, 2023 03:16 AM

See More Questions

Suppose the set of risk neutral measures for a given securities model is nonempty. Show that if the securities model is complete, then the set of risk neutral measures must be singleton. Consider the...
Given the discounted terminal payoff matrix and the current price vector S (0) = (123), find the state price of the Arrow security with discounted payoff e k ,k = 1, 2, 3. Does the securities model...
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
The manager of a $20 million portfolio of domestic stocks with a beta of 1.10 would like to begin diversifying internationally. He would like to sell $5 million of domestic stock and purchase $5...
How else can Best Buy compete against new competitors like Walmart and online companies?
Angie Jolson is the chair of the board of directors of Artel, Inc., and Sam Douglas is the chair of the board of directors of Fox Express, Inc. Jolson and Douglas meet to consider the possibility of...
In 2015, the city of San Francisco enacted an ordinance that required health warnings on advertisements for certain sugar-sweetened beverages (SSBs) that read: WARNING: Drinking beverages with added...
The following data for Throwback Industries, Inc. relate to the payroll for the week ended December 7, 2012: Employees Marino and Starr are office staff, and all of the other employees are sales...
Arrow Hospitality prepares adjustments monthly and showed the following at September 3 0 , 2 0 2 3 : ARROW HOSPITALITY Trial Balances September 3 0 , 2 0 2 3 Unadjusted Adjusted Trial Balance...
Define the pricing functional F(x) on the asset span S by F(x) = {y : y = S (0)h for some h such that x = S (1)h, where x S}. Show that if the law of one price holds, then F is a linear functional.
Construct a securities model such that it satisfies the law of one price but admits a dominant trading strategy. Construct a securities model where the initial price vector lies in the row space of...
Again consider a Little League team that has 15 players on its roster. a. How many ways are there to select 9 players for the starting lineup? b. How many ways are there to select 9 players for the...
The activity level of an Internal Service Fund is normally controlled by a. the appropriations made by its controlling legislative body. b. the flexible budget enacted by its controlling legislative...
If a computer previously recorded in the General Capital Assets accounts is contributed to a department accounted for in an Internal Service Fund, the computer will be recorded in the Internal...
Which of the following is not a common type of governmental fund expenditure? a. Capital outlay. b. Debt service. c. Salaries and wages. d. Depreciation. e. All of the above are common types of...
GAAP require which of the following statements to be prepared for an Internal Service Fund? a. Statement of net assets. b. Statement of budgetary compliance. c. Statement of cash flows. d. All of the...
Donated capital assets are valued by the recipient government at: a. fair market value at the date of donation. b. the original cost of the donated asset per the donor's records. c. the net book...
In the recession of 2008 one of the important factors was the rise in certain commodity costs, particularly food commodities. In June 2008 the price of the average four-person family food budget had...
For the vector whose polar components are (Vr = 1, VÎ¸ = 0), compute in polars all components of the second covariant derivative VÎ±;Î¼;Î½. To find...
In your own words, discuss the integrated marketing communications concept. Explain what its emphasis on consistent and complete messages implies with respect to promotion blends.
Relate the three basic promotion objectives to the four jobs (AIDA) of promotion using a specific example.
Discuss the communication process in relation to a producers promotion of an accessory productsay, a new electronic security system businesses use to limit access to areas where they store...
Part I - For each of the 5-steps of the Revenue Recognition Model 1. Describe how the model applies to this transaction. For any stops that is doesn't apply, simply include that it is not applicable....
Based on my projections, we are going to have a cash deficit of about $428,000 at the end of 2013 and a negative balance of about $312,000 by the end of 2014. The 2015 ending cash balance is...
Based on the liquidity and financial performance of SolarCity, paired with Tesla's pattern of incurring losses over the past fiscal years, I would advise against this acquisition. The risk simply...

Given the discounted terminal payoff matrix and the current price vectorS (0) = (134). (a) By

Question:

1 3*(1; 2) = | 1 1 3 5 24 1 3.

Step by Step Answer:

The commodity swap in the diagram works as follows The airline company agrees to buy a certain amoun...View the full answer

Mathematical Models Of Financial Derivative

Students also viewed these Business questions