Consider a single period model with a bond and a stock Assume that at timet 0 the value of the stock is 100 and the bond is 1 The value of the stock after one year (i e T 1) is equal to 110 2 or 95 2 Suppose that at timeT (a)The bond pays a continuously compounded interest rate that is equal to 0 1 Is the market arbitrage free If not construct an arbitrage portfolio (b)The bond pays a periodic interest rate that is equal to 0 1 Is the market arbitrage free If not construct an arbitrage portfolio ATTENTION DON'T GIVE ME SOLUTION FROM OTHER WEBSITES THEY ARE ALL WRONG

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Question: Consider a single-period model with a bond and a stock. Assume that at timet= 0 the value of the stock is 100 and the bond

Consider a single-period model with a bond and a stock. Assume that at timet= 0 the value of the stock is 100 and the bond is 1. The value of the stock after one year (i.e.T= 1) is equal to 110.2 or 95.2. Suppose that at timeT

(a)The bond pays a continuously compounded interest rate that is equal to 0.1. Is the market arbitrage-free?If not construct an arbitrage portfolio.
(b)The bond pays a periodic interest rate that is equal to 0.1. Is the market arbitrage- free?If not construct an arbitrage portfolio.

ATTENTION: DON'T GIVE ME SOLUTION FROM OTHER WEBSITES. THEY ARE ALL WRONG.

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