Let A(0) = 100, A(1) = 105, A(2) = 110.25 and suppose that stockprices can follo

Question

Let A(0) = 100, A(1) = 105, A(2) = 110.25 and suppose that stockprices can follow three possible
scenarios:
Scenario    S(0)   S(1)     S(2)
w1            100     110     130
w2            100     110      91
w3            100     90        91
(a) (10 points) Is there an arbitrage opportunity if there are norestrictions on short selling?
(b) (5 points) Is there an arbitrage opportunity if no shortselling of the risky asset is allowed?
(c) (10 points) Is there an arbitrage strategy if short selling ofstock is allowed, but transaction
costs of 1% of the transaction volume apply whenever stock istraded?

S(0) - stock price at time 0
S(1) - stock price at time 1
S(2) - stock price at time 2
A(0) - bond price at time 0
A(1) - bond price at time 1
A(2) - bond price at time 2

Explanation / Answer

Can you define your notation?

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