Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. problem 2 consider an economy in which there are t

Problem 2 Consider an economy in which there are two dates t = 0 and...

90.2K

Verified Solution

Question

Finance

image

Problem 2 Consider an economy in which there are two dates t = 0 and t = 1, and two possible states, i = 1 and i = 2, at t = 1, which occur with equal probability, so that 11 = 72 = 1/2. In this economy, two "complex" assets are traded. The first sells for price Pi = 2 at t = 0 and makes payoffs of Z1 = 2 in state i = 1 at t = 1 and Z} = 4 in state i = 2 at t = 1. The second sells for P. = 1.25 at t = 0 and makes payoffs Z) = 1 in state i = 1 at t = 1 and Z3 = 3 in state i = 2 at t = 1. a. Use this information to compute the price q' at t = 0 of a contingent claim that pays off one in state i = 1 at t = 1 and zero in state i = 2 at t = 1 and the price q- at t = 0 of a contingent claim that pays off zero in state i = 1 at t = 1 and one in state i = 2 at t = 1. b. Use your answers from part (a), above, to compute the price PO at t = 0 of a bond that pays off Z} = 1 in state i = 1 at t = 1 and 2 = 1 in state i = 2 at t = 1. c. Use your answers from part (a), above, to compute the price PO at t = 0 of a share of stock that makes no dividend payments, but can be sold for P. = 2 in state i = 1 at t = 1 and P2 = 3 in state i = 2 at t = 1

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students