Let (w, 2, ws) and 7 = 1 (time to maturity). Consider the market with two...
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Let (w₁, 2, ws) and 7 = 1 (time to maturity). Consider the market with two risky stocks and one risk-free bond. Suppose the risk-free return R = 0.25, and the initial values of the stocks are given by S₁ (0) 1, S₂(0) 1. Moreover Scenario 60²2 wy S(1) 0.5 2 0.5 S₂(1) 0.5 1.5 1.5 (1) (10 pts) Is the market arbitrage free? Justify your answer by finding the risk-neutral probabilities. (2) (10 pts) Consider now a European contingent claim (derivative) with final payoff H(₁)=5, H(₂) = 10, H(s) = 12.5. If the price of this claim is unique, find the unique initial price H(0). If the price is not unique, find the price range/interval for H(0) of this contingent claim. Let (w₁, 2, ws) and 7 = 1 (time to maturity). Consider the market with two risky stocks and one risk-free bond. Suppose the risk-free return R = 0.25, and the initial values of the stocks are given by S₁ (0) 1, S₂(0) 1. Moreover Scenario 60²2 wy S(1) 0.5 2 0.5 S₂(1) 0.5 1.5 1.5 (1) (10 pts) Is the market arbitrage free? Justify your answer by finding the risk-neutral probabilities. (2) (10 pts) Consider now a European contingent claim (derivative) with final payoff H(₁)=5, H(₂) = 10, H(s) = 12.5. If the price of this claim is unique, find the unique initial price H(0). If the price is not unique, find the price range/interval for H(0) of this contingent claim.
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To determine if the market is arbitragefree and find the riskneutral probabilities we can use the co... 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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