Derive the equilibrium price ratio of the contingent claims

Reference no: EM131189972

Question 1

Suppose we have an economy with 1 comodity, two possible states, and two consumers, and no trades at date 0. Agent 1 is risk-netral (i.e., Agent 1's utility function satisfies: u" (x) = 0) while Agent 2 is risk-averse(u''(x) < 0).

Assume:

β¹ = { 6 w.p. Π

{ 3 w.p. (1- Π)

β² = { 4 w.p. Π

{ 2 w.p. (1- Π)

1 a) Derive the equilibrium price ratio of the contingent claims contract for this economy.

1 b) Is there a value for the probability it, such that can Agent two achieve complete insurance in equilibrium?

If so, describe how it will be achieved. What is the value of Π, in this instance?

1c) What assumption did we make in this problem that was key to the result you obtained in 1a) and 1 b) Explain.

Reference no: EM131189972

Questions Cloud

How contemporary perceptions of hitlers nazi germany shaped : How are contemporary perceptions of Hitler's Nazi Germany shaped by either the Holocaust or the Trail of Adolf Eichmann? Your response should be at least 200 words in length.

What is the dollar price of the bond : Union Local School District has bonds outstanding with a coupon rate of 5.1 percent paid semiannually and 18 years to maturity. The yield to maturity on these bonds is 4.6 percent and the bonds have a par value of $10,000. What is the dollar price of..

Housing market crisis and subsequently to the financial : Under what conditions can such capital inflow be redirected to other countries? What are potential consequences of that to the U.S economy? Why is it unlikely that "global imbalances" contribute to the housing market crisis and subsequently to the ..

What is your impression of some of the core buddhist beliefs : What is your impression of some of the core Buddhist beliefs and which Buddhist teachings caught your attention most?

Derive the equilibrium price ratio of the contingent claims : Derive the equilibrium price ratio of the contingent claims contract for this economy and is there a value for the probability it, such that can Agent two achieve complete insurance in equilibrium?

Discuss at least one proposed solution for each barrier : Analyze and discuss at least three critical barriers that impact the health and well-being of your chosen group; one must be a micro-level (individual) barrier that is financial, one must be a macro-level (community/state) barrier that relates to ..

What are the calculated density of the substance : What are the calculated density and the probable identity of the substance?

How do we decide what our priorities are : There are a million or more major health challenges throughout the world, but limited resources to address them all. How do we decide what our priorities are?

What level of sales revenue is required for operating income : A resort hotel has total annual sales revenue of $1,000,000, variable costs of $350,000, and fixed costs of $570,000. The fixed costs include $80,000 a year for land rental lease. Calculate the hotel’s breakeven point. If the owners had an equity in..

User Account

All Pages