Consider a one-period model with 2 states and 2 assets: a bond and a stock. Assume that

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Consider a one-period model with 2 states and 2 assets: a bond and a stock. Assume that r = 0 so that the bond sells for $1 at t = 0 and paid $1 at t = 1. The initial stock price is $20 and it has two possible prices $30 and $15 at t = 1. (1). Is this model arbitrage free? If yes, find a state price vector and a risk neutral probability measure. Is it complete? Find the prices of the European call and put options on the stock with strike price K = $20. Also find the replicating trading strategies which replicate the cash flows for the options at t = 1.

Posted Date: Oct 02, 2021 11:55 AM

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Consider a one-period model with 2 states and 2 assets: a bond and a stock. Assume that

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Is this model arbitrage free If yes find a state price vector and a risk neutral probability measure Yes the model is arbitrage free A state price vec... View the full answer

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