Consider three assets with returns in three states of nature as follows: 2 3 0 -(1)...

    

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Consider three assets with returns in three states of nature as follows: 2 3 0 -(1) 2 3 T1 = 2 4 2 3 72 = , 13 = where k 0 is a parameter. (i) Examine whether or not this asset structure is incomplete for some values of the parameter k. [5 marks] (ii) Let k = 0. Examine whether or not the following vector of prices (corresponding to assets 71, 72 and r3 respectively) has the no arbitrage property 2 (3)-(0) 92 7 93 [5 marks] (iii) Let k = 4. If q = 92 = 3, find the price 93 of the asset r3 so that the vector of the three asset prices has the no arbitrage property. [5 marks] (iv) Let k = 1. If q = 2, 92 = 3, 93 = 2. Construct an option of your choice on the asset r3 and find its no arbitrage price. [5 marks] Consider three assets with returns in three states of nature as follows: 2 3 0 -(1) 2 3 T1 = 2 4 2 3 72 = , 13 = where k 0 is a parameter. (i) Examine whether or not this asset structure is incomplete for some values of the parameter k. [5 marks] (ii) Let k = 0. Examine whether or not the following vector of prices (corresponding to assets 71, 72 and r3 respectively) has the no arbitrage property 2 (3)-(0) 92 7 93 [5 marks] (iii) Let k = 4. If q = 92 = 3, find the price 93 of the asset r3 so that the vector of the three asset prices has the no arbitrage property. [5 marks] (iv) Let k = 1. If q = 2, 92 = 3, 93 = 2. Construct an option of your choice on the asset r3 and find its no arbitrage price. [5 marks]

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i To examine whether the asset structure is incomplete for some values of the parameter k we need to check if there exists a portfolio of assets that ... View the full answer