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Category > Economics Posted 12 Jul 2017 My Price 5.00

Assume you live in an Arrow-Debra

Stocks ti and Con ' 1 Claims Assume you live in an Arrow-Debra: economy where there is no arbitrage and flaere are two
periods: r=fl and 1:1. Investment decisions are made at 3:0 and the payoffs Ere-m these
investments are realizedln i=1. There are three possible states of the world in FL 131,2, or 3. Markets are complete in the
sense that contingent claims are traded in FD for all three possible states in 1:1. A oonnngent claim that pays 51 in state i=1 at .E'=‘l and 950' otherwise sells for q] =flfifl. A
secondconnngentclalm forstate i=2 sells for q2=fllfl inf=fl andathlrd contingmcrclaim
for state i=3 sells for for q] = 1115. at Fl]. a. Now consider a stock that trades at I=fl and has the possible values of
$51,135:; sun-1&3 =3 in posed !=1. For the specified contingent claims princes,
what is the value of the pace the stock should trade at t = [1, P5” ? h. If an investor has a call option that gives the met the tight, but not the obligation}
to puehase 1 share of stock at :21 at the sen: price K=2, let CUE; strait“:J
represent the payoffs the? JED receives in each state of the world #112} at t = 1.
What are the nunsetieal ‘E‘ilZIJEE of Click. and C] 7:" c. 1What passesI Fir}, will the null option sell for at #0?

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SuperTutor
(15)
Status NEW Posted 12 Jul 2017 04:07 AM My Price 5.00

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