Consider the finite probability space {w1, W2, W3}, and let IP be a probability measure such...
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Consider the finite probability space {w1, W2, W3}, and let IP be a probability measure such that P[{w}]> 0 for every i = 1, 2, 3. Define the one-period financial market that consists of the probability space (N, F, P), where F:= 22, and the assets S = (Sº, S¹, S²) which consist of the risk-free asset Sº and the two risky assets S¹, S². Their prices at time t = 0 are given by the vector S1 (₁) = = So = = while their prices at time t = 1, depending on whether scenario w₁,w2 or w3 occurs, are given by the vectors 1 (.). (65) 10 2 3 S1 (W₂) = 2 S1 (W3) = (1) (i) Show that this financial market admits an arbitrage. (ii) Assume now that S (3) 13 in (1), while all other prices remain the same. Show that this financial market is free of arbitrage and describe the set of equivalent martingale measures. Consider the finite probability space {w1, W2, W3}, and let IP be a probability measure such that P[{w}]> 0 for every i = 1, 2, 3. Define the one-period financial market that consists of the probability space (N, F, P), where F:= 22, and the assets S = (Sº, S¹, S²) which consist of the risk-free asset Sº and the two risky assets S¹, S². Their prices at time t = 0 are given by the vector S1 (₁) = = So = = while their prices at time t = 1, depending on whether scenario w₁,w2 or w3 occurs, are given by the vectors 1 (.). (65) 10 2 3 S1 (W₂) = 2 S1 (W3) = (1) (i) Show that this financial market admits an arbitrage. (ii) Assume now that S (3) 13 in (1), while all other prices remain the same. Show that this financial market is free of arbitrage and describe the set of equivalent martingale measures.
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Answer rating: 100% (QA)
SOLUTION To determine whether the financial market admits an arbitrage we need to check if there exists a trading strategy that guarantees a profit with no initial investment i To show that the financ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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