In a one-period financial market, the following securities are available for trade: a risk-free asset, yielding...
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In a one-period financial market, the following securities are available for trade: a risk-free asset, yielding a riskless rate r = 0.25; two risky stocks, S₁ and S2, with time-1 payoffs given by S₁(1)(w₁) = 2 S₁ (1) (w₂) 1.2 S₁ (1) (W3) = 4 = S₂ (1) (w1) = 5 S₂ (1) (₂) = 2 S₂(1)(W3) = 1.5 1. State whether the market is complete and arbitrage-free if the two risky securities, S₁ and S2, have time-0 prices S₁ (0) = 1.92 and S₂ (0) = 3. 2. Answer to the same questions of the previous point in case S₁ (0) = 0.88 and S₂ (0) 3.5. If the market is not arbitrage-free, provide an example of arbitrage. 3. If security S₂ takes the following values at time t = 1 S2 (1)(w1) = 6.75 S2 (1) (w2) 3.55 S2(1)(w3) 14.75 = = and has time-0 price S₂ (0) = 6.68, while S₁ is as at point 1, is the market arbitrage-free and complete? 4. If the security S₂ of point 3 has time-0 price S₂ (0) = 8, is the market arbitrage-free? Is it complete? In a one-period financial market, the following securities are available for trade: a risk-free asset, yielding a riskless rate r = 0.25; two risky stocks, S₁ and S2, with time-1 payoffs given by S₁(1)(w₁) = 2 S₁ (1) (w₂) 1.2 S₁ (1) (W3) = 4 = S₂ (1) (w1) = 5 S₂ (1) (₂) = 2 S₂(1)(W3) = 1.5 1. State whether the market is complete and arbitrage-free if the two risky securities, S₁ and S2, have time-0 prices S₁ (0) = 1.92 and S₂ (0) = 3. 2. Answer to the same questions of the previous point in case S₁ (0) = 0.88 and S₂ (0) 3.5. If the market is not arbitrage-free, provide an example of arbitrage. 3. If security S₂ takes the following values at time t = 1 S2 (1)(w1) = 6.75 S2 (1) (w2) 3.55 S2(1)(w3) 14.75 = = and has time-0 price S₂ (0) = 6.68, while S₁ is as at point 1, is the market arbitrage-free and complete? 4. If the security S₂ of point 3 has time-0 price S₂ (0) = 8, is the market arbitrage-free? Is it complete?
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ANSWER 1 The market is complete and arbitragefree Given the payoffs of S1 and S2 under w1 w2 w3 as w... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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