3. (4 marks) Consider the following 3-by-3 Arrow-Debreu model: two assets Si(t), i= 1,2, three states, wj, j = 1,..,3, representing the price of the underlyings in t = 1 year, first row is a cash account with r=0. le e el D=1 6 8 a 3 4 6 / With a > 0. The current value of the stocks is S10 = $8, S2(0) = $4. a) (2 marks) Assume a = 10, compute the price today of an option with payoff at t=1: (Si(1) - S2(1) -3)+ (a spread option). b) (2 marks) Assume a = 12, is the payoff Y (1,wi) = 4, Y (1,w2) = 6, Y(1,w3) = 10 attainable? Explain. 3. (4 marks) Consider the following 3-by-3 Arrow-Debreu model: two assets Si(t), i= 1,2, three states, wj, j = 1,..,3, representing the price of the underlyings in t = 1 year, first row is a cash account with r=0. le e el D=1 6 8 a 3 4 6 / With a > 0. The current value of the stocks is S10 = $8, S2(0) = $4. a) (2 marks) Assume a = 10, compute the price today of an option with payoff at t=1: (Si(1) - S2(1) -3)+ (a spread option). b) (2 marks) Assume a = 12, is the payoff Y (1,wi) = 4, Y (1,w2) = 6, Y(1,w3) = 10 attainable? Explain