(a)The price of Stock Y, which is currently $80, can go to $120, $90, or $60 in 6 months' time. Security A pays $1 if the price of Stock Y in 6 months is $120, and zero otherwise. Security B pays $1 if the price of Stock Y in 6 months is $90, and zero otherwise. Security C pays $1 if the price of Stock Y in 6 months is $60, and zero otherwise. The prices of these securities are ,, and , respectively. The discretely compounded risk-free interest rate is 5% per half-year (not annualised). When answering the questions below, explain your calculations.

In the absence of arbitrage, what is the total cost of purchasing one unit each of securities A, B, and C?

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To determine the total cost of purchasing one unit each of securities A B and C in the absence of ar... View the full answer