.l here are too securities tn one Smie-period financial market. One is a riskine

Question

.l here are too securities tn one Smie-period financial market. One is a riskiness Gecority torth annual reburn r. The other one is a rioky aeset uwith foture price ST,St follouws a binomial distribution as follows Assume that both Secorities hve value, $1 at time O a) State the condrtors under the market is free of arbitrage goume that the market 1s arbtrage-free. Consider one Secority uwhose Pryoff is $ 2 attme t if the risky asset price equaly d. Calculate the no-arbutrage valve otthis Secoriby at time O b) A

Explanation / Answer

1.
For no arbitrage:
(u*p+(1-p)*d)=(1+r)
=>p=(1+r-d)/(u-d)

2.
Assuming the payoff is 0 if risky asset price equals u
No arbitrage value at t=0:
2*(1-p)/(1+r)

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.