Suppose that we can describe the world using two states and that two assets are available, asset
Question:
Suppose that we can describe the world using two states and that two assets are available, asset K an asset L. We assume the asset’s future prices have the following distribution Suppose that we can describe the world using two states and that two assets are available, asset K an asset L. We assume the asset’s future prices have the following distribution
| State | Future Prices Asset K | Future Prices Asset L |
| 1 | $55 | $60 |
| 2 | $45 | $30 |
The current price of asset K is $50, and the current price of asset L is $50. What are the values of the unit claims (C1 and C2)? What is the risk free rate implied by these assets? What is the “risk neutral probability” of state 1? What is the “risk neutral probability” of state 2? What is the price implied for an asset providing $100 in state 1 and $50 in state 2? You plan to buy a home for $100,000 in the future. You want to guarantee that you will have the money. What would you buy/sell today to accomplish this, and what would it cost today?
Expert Answer:
We can use the following formula to calculate the values of the unit claims Value of Unit Claim Future Price of Asset in State Probability of State Fo... View the full answer
