Consider a capital market with two securities. The payoffs of these securities in the two equally...
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Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Price P₁ = 2 PR = 3 Security A B Payoff State 1 4 3 State 2 2 4 a) Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure securities by arbitrage. (25 marks) b) Using the arbitrage principle, determine the prices of a put option on stock A with an exercise price of $4 and a call option on stock B with an exercise price of $2. (20 marks) Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Price P₁ = 2 PR = 3 Security A B Payoff State 1 4 3 State 2 2 4 a) Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure securities by arbitrage. (25 marks) b) Using the arbitrage principle, determine the prices of a put option on stock A with an exercise price of $4 and a call option on stock B with an exercise price of $2. (20 marks)
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Related Book For
Financial Theory and Corporate Policy
ISBN: 978-0321127211
4th edition
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri
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