What is the model price, Set up a risk free hedge of 1

What is the model price

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Reference no: EM131757957

Question 1. You have two assets. One asset, s, has a price given by an Arithmetic Brownian motion, and the second asset has a process given by F(s,t), Set up a risk free hedge of 1 share of stock and - m shares of the second asset. What is the value of m?

Question 2. If two assets have the same price, must they have the same return distribution (it can be discrete), explain why or why not with an example if possible (Yes, you can arrive at the correct answer with a 1 period, 2 state, state preference model)?

Question 3. You have a stock of price $48 today (time 0). At time 3 the option will pay the maximum price at T1, T2, and T3 less $50 or 0, whichever is greater. The stock price goes up or down 12% each period and the risk free rate is 3%. What is the model price?

Reference no: EM131757957

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