Only question (b)

Problem 3.4 Consider a two-period economy with five possible states in the future. There are no markets for Arrow securities, so you cannot observe the Arrow security prices. Yet, you can observe the prices of the following financial assets: asset price cash flow in state... 1 2 3 4 5 share of company X 2.857 8 5 2 0 0 share of company Y 4.048 12 8 0 0 4 bond of company X 0.774 1 1 1 1 0 bond of company Y 0.893 1 1 1 0 1 option on share X 1.429 6 3 0 0 0 The option on the share of company X is a call option with exercise price 2. (a) is the market complete? (Probably you need to use a computer to answer this and the following questions.) (b) Compute the prices that Arrow securities would have if they were traded. Problem 3.4 Consider a two-period economy with five possible states in the future. There are no markets for Arrow securities, so you cannot observe the Arrow security prices. Yet, you can observe the prices of the following financial assets: asset price cash flow in state... 1 2 3 4 5 share of company X 2.857 8 5 2 0 0 share of company Y 4.048 12 8 0 0 4 bond of company X 0.774 1 1 1 1 0 bond of company Y 0.893 1 1 1 0 1 option on share X 1.429 6 3 0 0 0 The option on the share of company X is a call option with exercise price 2. (a) is the market complete? (Probably you need to use a computer to answer this and the following questions.) (b) Compute the prices that Arrow securities would have if they were traded