Question: Problem 4. (Pricing a call option by no arbitrage.) There are 2 states. The price asset 1, a risk-free asset is 1. The price

Problem 4. (Pricing a call option by no arbitrage.) There are 2

Problem 4. (Pricing a call option by no arbitrage.) There are 2 states. The price asset 1, a risk-free asset is 1. The price of asset 2, a stock, is 3. We want to find the price of a call option on the stock with strike price 4. The call option gives you the right (but not the obligation) to buy the stock at price 4 after you learn which state you are in. states 1 2 price 1 1 1 asset 1 (risk-free) asset 2 (stock) 26 3 asset 3 (call option) ? ? ? (a) Write the payoffs of the call option - call it asset 3. (b) Find the price of the call option.

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