In a one-period financial market, the following securities are available for trade: a risk-free asset, yielding...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
In a one-period financial market, the following securities are available for trade: a risk-free asset, yielding a riskless rate r = 0.25; two risky stocks, S₁ and S2, with time-1 payoffs given by S₁(1)(w₁) = 2 S₁ (1) (w₂) 1.2 S₁ (1) (W3) = 4 = S₂ (1) (w1) = 5 S₂ (1) (₂) = 2 S₂(1)(W3) = 1.5 1. State whether the market is complete and arbitrage-free if the two risky securities, S₁ and S2, have time-0 prices S₁ (0) = 1.92 and S₂ (0) = 3. 2. Answer to the same questions of the previous point in case S₁ (0) = 0.88 and S₂ (0) 3.5. If the market is not arbitrage-free, provide an example of arbitrage. 3. If security S₂ takes the following values at time t = 1 S2 (1)(w1) = 6.75 S2 (1) (w2) 3.55 S2(1)(w3) 14.75 = = and has time-0 price S₂ (0) = 6.68, while S₁ is as at point 1, is the market arbitrage-free and complete? 4. If the security S₂ of point 3 has time-0 price S₂ (0) = 8, is the market arbitrage-free? Is it complete? In a one-period financial market, the following securities are available for trade: a risk-free asset, yielding a riskless rate r = 0.25; two risky stocks, S₁ and S2, with time-1 payoffs given by S₁(1)(w₁) = 2 S₁ (1) (w₂) 1.2 S₁ (1) (W3) = 4 = S₂ (1) (w1) = 5 S₂ (1) (₂) = 2 S₂(1)(W3) = 1.5 1. State whether the market is complete and arbitrage-free if the two risky securities, S₁ and S2, have time-0 prices S₁ (0) = 1.92 and S₂ (0) = 3. 2. Answer to the same questions of the previous point in case S₁ (0) = 0.88 and S₂ (0) 3.5. If the market is not arbitrage-free, provide an example of arbitrage. 3. If security S₂ takes the following values at time t = 1 S2 (1)(w1) = 6.75 S2 (1) (w2) 3.55 S2(1)(w3) 14.75 = = and has time-0 price S₂ (0) = 6.68, while S₁ is as at point 1, is the market arbitrage-free and complete? 4. If the security S₂ of point 3 has time-0 price S₂ (0) = 8, is the market arbitrage-free? Is it complete?
Expert Answer:
Answer rating: 100% (QA)
ANSWER 1 The market is complete and arbitragefree Given the payoffs of S1 and S2 under w1 w2 w3 as w... 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:
Students also viewed these finance questions
-
Determine the acceleration of the body of mass m = 4 , 0 0 0 g ( grams ) . The forces acting on this body are: F 1 = 1 0 N and F 2 = 2 N . ( neglect friction ) . Show your work. Express your result...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Three taxpayers each wish to make a BADR claim in relation to a qualifying disposal made during 2020-21. Their previous claims are as follows: (a) Gemma made a BADR claim in relation to a gain of...
-
Pheasant, Inc., is going to be subject to the AMT in 2017. The corporation owns an investment building and is considering disposing of it and investing in other realty. Based on an appraisal of the...
-
Comment on the use of a box plot to explore a data set with four attributes: age, weight, height, and income.
-
What is the most widely followed statistic in business? a. Gross profit b. Earnings per share c. Retained earnings d. Dividends
-
An investigator wants to take an unequal-probability sample of 10 of the 25 psus in the population listed below and in file exercise0602.dat, and wishes to sample units with replacement. a. Adapt the...
-
The following summarizes the results of an aging analysis of Glenview Company's accounts receivable at the end of the year. Estimated Percent Age Group 0-30 days Amount $ 420,000 Uncollectible...
-
The Silver Star Bicycle Company will be manufacturing mens and womens models of its Easy-Pedal 10-speed bicycle during the next two months, and the company would like a production schedule indicating...
-
A 200-V, 3-A dc power supply is to be designed with less than a 2 percent ripple voltage. Compare the pros and cons of implementing this power sup- ply with half-wave, full-wave, and full-wave bridge...
-
These financial statement items are for Basten Company at year-end, July 31, 2019. Salaries and Wages Payable Salaries and Wages Expense Utilities Expense Equipment Accounts Payable Service Revenue...
-
Discount rate12% Assume the following cash flows on the specified date 1/2/13 $(1,000.00) 9/19/13 $250.0 1/2/ 14$250.0 1/2/15 $300.0 1/2/16 $350.0 1/2/17 $250.0...
-
The market price of a semi-annual pay bond is $957.95. It has 15.00 years to maturity and a coupon rate of 7.00%. Par value is $1,000. What is the yield to maturity? The market price of a semi-annual...
-
(1) A borrower finds that the incremental cost of borrowing an extra $10,000 is 14%. If the borrower can earn 12% on alternative investments of comparable risk should he borrow the extra $10,000 at...
-
The sheet Inventory lists a grocery store's inventory for two months. Calculate the percent change for each item to two decimal places. If the formula gives an error, put "Initial Stock" in the cell....
-
3. Captain Mack's, a seafood restaurant, offers medical cost coverage for its employees. It's probability distribution for medical costs for the coming year is as follow Medical costs = Calculate...
-
Write a paper about the Working relationship in the organization- collaboration within and outside the organization
-
Kathy Kennedy (age 44) is a single taxpayer and she lives at 212 North Pine Way, Payson, AZ 85541. Her Social Security number is 467-98-9784. Kathy's earnings and income tax withholding as the...
-
Sherry Hopson owns a retail family clothing store. Her store is located at 4321 Circle Drive, Houston, TX 77001. Her employer identification number is 95- 1234321 and her Social Security number is...
-
Abigail (Abby) Boxer is a single mother working as a civilian accountant for the U.S. Army. Her Social Security number is 676-73-3311 and she lives at 3456 Alamo Way, San Antonio, TX 78249. Helen,...
-
Use the data given in exercise SB-3. Assume that in November 2021, General Motors sold half its investment in \(\mathrm{ABC}\) to Toyota. The sale price was \(\$ 14\) million. Compute General...
-
Use the data given in exercise SB-1. On May 19, 2021, Knowlton sold its investment in BCE shares for \(\$ 26\) per share. 1. Journalize the sale. No explanation is required. 2. How does the gain or...
-
Arnold Financing leases airplanes to airline companies. Arnold has just signed a 10 -year lease agreement that requires annual lease payments of \(\$ 1,000,000\). What is the present value of the...
Study smarter with the SolutionInn App