Question: In an economy there are two states of the world and four assets. You are given the following prices for three of these securities in

In an economy there are two states of the world and four assets. You are given the following prices for three of these securities in different states of the world:

In an economy there are two states of the world

"Current" prices for A, B, C are 100, 70, and 180, respectively.
(a) Are the "current" prices of the three securities arbitrage-free?
(b) If not, what type of arbitrage portfolio should one form?
(c) Determine a set of arbitrage-free prices for securities A, B, and C.
(d) Suppose we introduce a fourth security, which is a one-period futures contract written on B. What is its price?
(e) Suppose a put option with strike price K = 125 is written on C. The option expires in period 2. What is its arbitrage free price?

Price Dividends State 1 State 2 State State 2 Security A 12070 Security B60 3 Security C 90 150 10

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