Reference no: EM131446829
Consider an economy with two dates (t=0,1) and at t=1 there are three states. The following three stocks are traded: x1=(10,0,30) x2=(0,20,40) x3=(20,20,0) The t=0 prices of these stocks are given as follows (p1, p2, p3)=(12, 14, 8)
(a) Is there an arbitrage?
Suppose an investment firm sells options
(b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=8?
(c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=12?
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