Solution-Can you find a three equation system with 4 states

Can you find a three equation system with 4 states

Assignment Help Finance Basics

Reference no: EM131107913

Consider a stock St and a plain vanilla, at-the-money, put option written on this stock. The option expires at time t + Δ, where Δ denotes a small interval. At time t, there are only two possible ways the St can move. It can either go up to Sut+Δ, of go down to Sut+Δ. Also available to traders is risk-free borrowing and lending at annual rate r.

(a) Using the arbitrage theorem, write down a three-equation system with two states that gives the arbitrage-free values of Sr and Ct.

(b) Now plot a two-step binomial tree for St. suppose at every node of the tree the markets are arbitrage-free. How many three-equation systems similar to the preceding case could then be written for entire tree?

(d) How do we know that all the implied state prices are internally consistent?

Reference no: EM131107913

Questions Cloud

In preparation for a visit with their insurance agent : Wendy and Frank Kampe, 30 and 35, are considering the purchase of life insurance. Wendy doesnAc€?ct have any coverage whereas Frank has a $150,000 group policy at work. The Kampes have two young children, ages 3 and 5.

What programs are available to help the local business : What does the emergency manager have to tell the local business community about a business continuity plan? What programs are available to help the local business in this endeavor? Give examples.

Classify goods by category-private-public-common-monopoly : Classify the following goods by category (private, public, common, monopoly) and explain why:

Always quoted on an annual basis unless otherwise specified : Suppose the spot rates for 1 and 2 years are s1=6.3% and s2=6.9% with annual compounding. Recall that in this course interest rates are always quoted on an annual basis unless otherwise specified. What is the discount rate d(0,2)?

Can you find a three equation system with 4 states : Using the arbitrage theorem, write down a three-equation system with two states that gives the arbitrage-free values of Sr and Ct. Now plot a two-step binomial tree for St. suppose at every node of the tree the markets are arbitrage-free. How many th..

Account deficit to grow while budget deficit has disappeared : Is the budget deficit of a country linked to its current account balance? If so, how so? If not, why not? Explain how it is possible for the United States’ current account deficit to grow while the budget deficit has disappeared.

Trading for twelve years and during this period : Beta plc has been trading for twelve years and during this period has achieved a good profit record. To date, the company has not been listed on a recognised stock exchange.

Interest rate in the months : Explain the dilemma faced by the Fed in May 2008. Why might the Fed decide to cut the interest rate in the months after May 2008? Why might the Fed decide to raise the interest rate in the months after May 2008?

Explain a detailed value chain for the product : List the different types of promotion, provide pros and cons of each type, and provide an example of each type. Select a product and draw and explain a detailed value chain for the product.

User Account

All Pages

Can you find a three equation system with 4 states

Reference no: EM131107913

Reference no: EM131107913

Questions Cloud

Reviews

Write a Review

Finance Basics Questions & Answers

Financial reporting and analysis

A report on financial accounting

Describe the types of financial ratios

Differences between sole proprietorship and corporation

Prepare a cash budget statement

What are the implied interest rates

State pricing theory and no-arbitrage pricing theory

Small business administration

Effect of financial leverage

Evaluate the basis for the payment to the lender

Importance of opps, ipps, mpfs and dmepos

Time value of money

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT