Reference no: EM131107906
In an economy there are two states of the world and four assets. You are given the following prices for three of these securities in different states of the world:
"Current" prices for A, B, C are 100, 70, and 180, respectively.
(a) Are the "current" process of the three securities arbitrage-free?
(b) If not, what type of arbitrage portfolio should one form?
(c) Determine a set of arbitrage-free prices for securities A, B, and C.
(d) Suppose we introduce a fourth security, which is a one-period futures contract written on B. is its price?
(e) Suppose a put option with strike price K = 125 is written on C.
The option expire in period 2. What is its arbitrage-freeprice?
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