In an economy there are two states of the world and four assets. You are given the
Question:
"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?
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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Related Book For
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
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