FREE Trial

A trader is considering purchasing several Arrow-Debreu securities which all have the same maturity time, but provide a payoff...

This problem has been solved!
Do you need an answer to a question different from the above? Ask your question!

Question:

A trader is considering purchasing several Arrow-Debreu securities which all have the same maturity time, but In a two-step model, derive a formula for the total premium of all the Arrow-Debreu securities (that is,
Transcribed Image Text:

A trader is considering purchasing several Arrow-Debreu securities which all have the same maturity time, but provide a payoff of $1 at all possible states of the maturity time. The trader thinks that this is a very clever investment plan, and is possibly an arbitrage opportunity because it ensures there is always a payoff of $1. Here we investigate the trader's investment plan using a two-step binomial pricing model. Assume that the return on an investment over one time-step is constant R and the risk-neutral probability of the upstate is T. In a two-step model, derive a formula for the total premium of all the Arrow-Debreu securities (that is, derive formulas for the premiums of each Arrow-Debreu security and then add them together). Given your answer in Question above, describe a portfolio which is a replicating portfolio of the sum of all Arrow-Debreu securities. Confirm that this portfolio is a replicating portfolio by showing that at each node it equals the sum of all Arrow- Debreu securities.

Expert Answer:

Answer rating: 100% (QA)

To derive a formula for the total premium of all the Arrow Debreu securities in a two step binomial pricing model we can first calculate the premium f View the full answer


answer-question
Related Book For  answer-question
Modern Database Management

Modern Database Management

ISBN: 978-0133544619

12th edition

Authors: Jeff Hoffer, Ramesh Venkataraman, Heikki Topi

View Solution
Create a free account to access the answer
Cannot find your solution?
Post a FREE question now and get an answer within minutes. * Average response time.
Posted Date: September 26, 2023 01:25:39
See More Questions

Students also viewed these finance questions

Q:
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
A:
A hotel s target market is a specific subset of all hotel customers from whom a particular property seeks to obtain business This could be business travelers and families on vacation to a hotel near a......
Q:
Displacement vector A(vector) points due east and has a magnitude of 2.00 km. Displacement vector B(vector) points due north and has a magnitude of 3.75 km. Displacement vector C(vector) points due...
A:
Using the component method we find the components of the resultant R that are......
Q:
One unit of A is made of one unit of B and one unit of C. B is made of four units of C and one unit each of E and F. C is made of two units of D and one unit of E. E is made of three units of F. Item...
A:
Period 1 2 3 4 5 6 7 8 9 10 Item A Gross requirements 50 OH 20 Scheduled receipts 10 LT 2 Projected......
Q:
Heidi Jara opened Jara's Cleaning Service on July 1, 2015. During July, the following transactions were completed. July 1 Stockholders invested $20,000 cash in the business in exchange for common...
A:
a General Journal J1 Date Account Titles and Explanation Ref Debit Credit July 1 Cash 101 20 000 Common Stock 311 20 000 1 Equipment 157 9 000 Cash 101 4 000 Accounts Payable 201 5 000 3 Supplies 126......
Q:
If the government levies a pollution tax such that the utility generates the efficient quantity of electricity, calculate the quantity of electricity generated, the price of electricity, the size of...
A:
Click to View...
Q:
Allen Air Conditioning manufactures room air conditioners at plants in Houston, Phoenix, and Memphis. These are sent to regional distributors in Dallas, Atlanta, and Denver. The shipping costs vary,...
A:
The optimal cost 14 700 From To Hous......
Q:
Let us take a trip into history and move to 18'th century Anatolia. The province of Erzurum sends agricultural tax (r) worth 1000 pieces of gold to the Imperial Treasury in Istanbul. Since the...
A:
One historical payment method that could be devised to transfer the proceeds of the agricultural tax......
Q:
On 1 June 20X7 Kha bought 60% of Sha paying $76,000 cash. The summarized statement of financial positions for the two entities as at 30 November 20X7 are Kha $ Sha $ Non-current assets Property,...
A:
Click to View...
Q:
A occtangular plate with oadius 12mm as shown semicisculas gooove of in fig is subjected to (a) Tensile fooce of 10KN. (b) Bending moment of 15 Nm. dck. The max stoess induced R12 in each case. I 12...
A:
The detailed......
Q:
A water sample is found to have 9.4 ppb of chloroform, CHCl 3 . How many grams of CHCl 3 would be found in a glassful (250 mL) of this water?
A:
We are given that the water sample contains 9 4 ppb of chloroform CHCl3 and we want t......
Q:
An aqueous solution is 6.00% methanol (CH 3 OH) by mass, with d = 0.988 g/mL. What is the molarity of CH 3 OH in this solution?
A:
1 Given that the solution is 6 00 methanol by mass this means that 6 00 grams of methanol is dissolv......
Q:
Two correct statements about the reversible reaction N 2 (g) + O 2 (g) 2 NO(g) are (a) K = K p ; (b) The equilibrium amount of NO increases with an increased total gas pressure; (c) The equilibrium...
A:
The correct statements are a and d a K and Kp are related by the equation Kp K R......
Q:
A 30.00%-by-mass solution of nitric acid, HNO 3 , in water has a density of 1.18 g/cm 3 at 20 C. What is the molarity of HNO 3 in this solution?
A:
Calculate the mass of HNO3 in 1 L of solution Given the s......
Q:
A 0.72 g sample of polyvinyl chloride (PVC) is dissolved in 250.0 mL of a suitable solvent at 25 C. The solution has an osmotic pressure of 1.67 mmHg. What is the molar mass of the PVC?
A:
The molar mass of a polymer can be determined using the......
Q:
The production department of Zan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter...
A:
Click to View...
Q:
Given that all the choices are true, which one concludes the paragraph with a precise and detailed description that relates to the main topic of the essay? A. NO CHANGE B. Decades, X-ray C. Decades...
A:
The best answer is A This sentence is really two comp......
Q:
What are the six common steps needed to access databases from a typical program?
A:
a Identify and register a database driver b......
Q:
Distinguish among data definition commands, data manipulation commands, and data control commands.
A:
a The data definition language DDL commands of SQL are used to define......
Q:
What are the benefits of the use of a surrogate key?
A:
The main benefit of using a surrogate key is that a surrogate key has......
Psychology In Marketing And Sales Understand How Customers Think When Buying 1st Edition - ISBN: 170363151X - Free Book