1 State Prices 1. Draw a date-event tree for three future periods (T =3), i.e. t = 0,1,2,3, and 15 states. How many immediate successor states does each state have? 2. Suppose in a finance economy with S = 2 and T = 1 there is only one asset which pays 1 GBP in each of the two possible future states. (1) Are markets complete or not? (2) In a diagram with the payoffs in the two states on the two axes, draw the asset span. 3. In a finance economy with T = 1 and S = 3 there are four securities, J = 4, with payoffs given by 21 1 03 0 1 1 0 4 0 The prices of the AD securities are pi = 2, P2 = 1, and P3 = 3. (1) Are markets complete? (2) What are the prices of the four securities? 0 Z = 1 State Prices 1. Draw a date-event tree for three future periods (T =3), i.e. t = 0,1,2,3, and 15 states. How many immediate successor states does each state have? 2. Suppose in a finance economy with S = 2 and T = 1 there is only one asset which pays 1 GBP in each of the two possible future states. (1) Are markets complete or not? (2) In a diagram with the payoffs in the two states on the two axes, draw the asset span. 3. In a finance economy with T = 1 and S = 3 there are four securities, J = 4, with payoffs given by 21 1 03 0 1 1 0 4 0 The prices of the AD securities are pi = 2, P2 = 1, and P3 = 3. (1) Are markets complete? (2) What are the prices of the four securities? 0 Z =