Question: Consider the non-arbitrage theorem. a) Formulate the non-arbitrage theorem in the case of 3 assets and 2 states of nature. [10 marks] b) Let P

Consider the non-arbitrage theorem.

a) Formulate the non-arbitrage theorem in the case of 3 assets and 2 states of nature. [10 marks]

b) Let P be the risk neutral (also called risk adjusted) probability measure. How can the probability measure P be used to calculate asset prices at time t in terms of asset prices at time (t+1)? [5 marks]

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