Consider the following model. A(0) = 10, A(1) = 11.5, S(0) = 35, and S(1) has...
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Consider the following model. A(0) = 10, A(1) = 11.5, S(0) = 35, and S(1) has the following distribution 25, with probability p₁ with probability P2 with probability P3, 30, 45, where p₁ and P2 and p3 are positive numbers such that p₁ + P2 + P3 = 1. 1. Consider a portfolio with null initial value (i.e. V(0) = 0). Determine the relationship between the components of this portfolio. 2. Describe the portfolio with null initial values that have nonnegative value at time ONE for all scenarios (i.e. V(1) ≥ 0 for all scenarios). 3. Does this model admit arbitrage opportunities? Hint: Use your answers parts al) and 2). 4. Could you replicate a call option with 30 dollars as strike price? S(1) = Consider the following model. A(0) = 10, A(1) = 11.5, S(0) = 35, and S(1) has the following distribution 25, with probability p₁ with probability P2 with probability P3, 30, 45, where p₁ and P2 and p3 are positive numbers such that p₁ + P2 + P3 = 1. 1. Consider a portfolio with null initial value (i.e. V(0) = 0). Determine the relationship between the components of this portfolio. 2. Describe the portfolio with null initial values that have nonnegative value at time ONE for all scenarios (i.e. V(1) ≥ 0 for all scenarios). 3. Does this model admit arbitrage opportunities? Hint: Use your answers parts al) and 2). 4. Could you replicate a call option with 30 dollars as strike price? S(1) =
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aV00 V1A1A0S1S0 V1105S1 Thus the components of the portfolio are A0 A1 S0 S1 Since A0 and A1 are kno... View the full answer
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