Define what it means by a replicating portfolio in this mark

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1. Consider a market consisting of N + 1 risky assets (define your own notation for the price of these assets over the epochs), and M states of the world. Consider the case of only two epochs (thus one period). (a) Define what it means by a replicating portfolio in this market. (b) Define what it means by a portfolio that leads to an arbitrage. (¢) State and show (without proof) the first fundamental theorem of finance (FF'T) (you need a numeraire here). (d) State and show the second fundamental theorem of finance (SFT).

Reference no: EM133715902

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