Show that the following tree is not arbitrage free Time 0 Time 1 Zero Coupon Bond Prices B(1,3) 0 9167 B(1,2 0 9620 (Up state) (0) 0 3 B (0,3) 0 83 B(0,2) 0 93R(O)0 0309 B(0,1) 0 97 B(1,3)0 8977 B(1,2)d 0 9555Down state) Money Market Account (mma) A(0) 1 A(1)1R(O) 1 0309...

Compute the up and down factors u 03 B13u B03 09167083 11044 d ...

Show that the following tree is not arbitrage- free. Time 0 Time 1 Zero-Coupon Bond Prices B(1,3)

Question:

Show that the following tree is not arbitrage- free.

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

Step by Step Answer:

Related Book For book-img-for-question

An Introduction to Derivative Securities Financial Markets and Risk Management

ISBN: 978-0393913071

1st edition

Authors: Robert A. Jarrow, Arkadev Chatterjee

See More Books

Question Posted: Dec 02, 2015 04:01 AM

See More Questions

Nike, Inc., is a leading manufacturer and marketer of sport and fashion footwear. Incorporated in 1968 and headquartered in Beaverton, Oregon, its brand name has become almost universal, delivering...
Kimberly-Clark Corporation manufactures and markets a variety of personal care and health products under brand names that include Kleenex, Buggies, Scott, Scottex, Cottonelle, Viva, Kotex, and...
Show that the following relationship is true: (A/P, i%, N) = i/[1(P/F, i%, N)].
Timco is considering the construction of a new retail outlet. The construction cost will be 400000. Net working capital will increase by 10000. The depreciation is 10 year MACRS. The new location...
A study was made of frequent fliers, and it was found that 53% had an income over $65,000 a year. a. Fifteen frequent fliers were selected at random, and their incomes recorded. What is the...
A consumer advocacy group suspects that a local supermarkets 10-ounce packages of cheddar cheese actually weigh less than 10 ounces. The group took a random sample of 20 such packages and found that...
Describe the importance of a multidisciplinary approach to patient care.
Cammie received 100 NQOs (each option provides a right to purchase 10 shares of MNL stock for $10 per share) at the time she started working for MNL Corporation four years ago when MNL's stock price...
1 Consider the integral dx. Does the integral converge or diverge? How do you know? 1 We will use a right hand sum with Ax = 1 to approximate the value of dx. Write out the first four terms of this...
Jorg is building an office building for Wilmington Company for $20,000,000. The contract has the following characteristics: The office building is built to the customers specifications and the...
Explain how to construct a swap using a floating-rate bond and a fixed- rate bond.
For the single-period evolution in the preceding figure, consider a caplet with maturity time 1 with strike rate k = 0.03. a. What is the value of this caplet at time 0? b. What is the delta for this...
Explain why heat pumps do not work as well in very cold climates as they do in milder ones. Is the same true of refrigerators?
What is Roys identity in a consumption utility maximization problem? What is the counterpart of this identity in a consumers expenditure minimization problem?
Present analytical forms of functions of the demand and of the supply on a market of two goods so that these goods are (a) independent, (b) complementary, (c) substitute, to each other.
The demand for a product of a monopolistic company evolves according to a linear function of a form: yd (t) = a(t)p(t) + b(t), a(t), b(t) > 0, A function of production total cost is given as ko (ys...
How do the optimal supply and a product optimal price set by a monopo- list react to changes in values of parameters of production cost function and demand function when there is an exogenously...
What does it mean that a production function describes a set of technologically effective production processes?
Draw an accurate graph showing distance versus time for the car in Problem 13. What is the slope of the graph? Data from in problem 13 How far does a car going 25 m/s travel in 5 s? How far would a...
g(x) = x 5 5x 6 a. Show that g(x) = 0 has a root, , between x = 1 and x = 2. b. Show that the equation g(x) = 0 can be written as x = (px + q) 1/r , where p, q and r are integers to be found. The...
What are some warning signs to management that a problem loan may be developing?
A lender's cost accounting system reveals that its losses on real estate loans average 0.45 percent of loan volume and its operating expenses from making these loans average 1.85 percent of loan...
Why is lending so closely regulated by state and federal authorities?
Provide a project heading ( either at the beginning of page 1 or as a separate title page ) with the following: Project Management Plan Proposal Include two sections, as follows: Section 1 : Business...
Gatorade (a Pepsico product) is sold in each territory through competing independent wholesalers who then resell it to retailers. In contrast, All Sport (also a Pepsico product) is sold through a...
Your team writes up a list of reasons why Skype will help employees to not only become more efficient because they are being monitored, but also that using Skype to communicate with other employees...

Show that the following tree is not arbitrage- free. Time 0 Time 1 Zero-Coupon Bond Prices B(1,3)

Question:

Time 0 Time 1 Zero-Coupon Bond Prices B(1,3) 0.9167 B(1,2 0.9620 (Up" state) (0)-0.3 B (0,3) 0.83 B(0,2)-0.93R(O)0.0309 B(0,1) 0.97 B(1,3)0.8977 B(1,2)d-0.9555Down" state) Money Market Account (mma) A(0) 1 A(1)1R(O) 1.0309

Step by Step Answer:

Compute the up and down factors u 03 B13u B03 09167083 11044 d ...View the full answer

An Introduction to Derivative Securities Financial Markets and Risk Management

Students also viewed these Banking questions