This is a question regarding financial mathematics on the elementary market model with two states { 1
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This is a question regarding financial mathematics on the elementary market model with two states {ω 1 ,ω 2 } in a single-period. How do I show that the extended model M = (B,S,P) is arbitrage-free using the 3 conditions in FTAP that is:
There is an arbitrage opportunity if:
a) the initial wealth x=0
b) the wealth at time t=1 must be non-negative (no losses)
c) there exist any ω i such that the wealth at time t=1 is strictly positive (there's a profit)
The P is a put option and S is a stock, B is the bond price.Here P=(P 0 ,P 1 ) is the price process of the put with a fixed strike K>0.
Related Book For
Finite Mathematics and Its Applications
ISBN: 978-0134768632
12th edition
Authors: Larry J. Goldstein, David I. Schneider, Martha J. Siegel, Steven Hair
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