Consider a one-period economy with two times, 0 and T. There are S = 3 states...

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Consider a one-period economy with two times, 0 and T. There are S = 3 states and N = 2 securities with payoffs and prices p = [10, 10]'. D = ( 10 9 10 10 10 11 (a) Does this market satisfy the Law of One Price? Explain why or why not. (b) Using the Fundamental Theorem of Asset Pricing, determine whether or not the price system admits arbitrage. (c) What is the equilibrium price of a call option on Security 2, with exercise price 10, and expiring at t = T? Consider a one-period economy with two times, 0 and T. There are S = 3 states and N = 2 securities with payoffs and prices p = [10, 10]'. D = ( 10 9 10 10 10 11 (a) Does this market satisfy the Law of One Price? Explain why or why not. (b) Using the Fundamental Theorem of Asset Pricing, determine whether or not the price system admits arbitrage. (c) What is the equilibrium price of a call option on Security 2, with exercise price 10, and expiring at t = T?

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a To determine if the market satisfies the Law of One Price we need to check if the prices of the securities reflect the same underlying value across all states of the economy If the Law of One Price ... View the full answer