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Problem 3. Consider a single-period model with So = (0,1, , )' and 1 1...

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Problem 3. Consider a single-period model with So = (0,1, , )' and 1 1 1 1 D= 0 1 0 3 1 0 0 0 0 1 0 0 (a) Show that the model is arbitrage-free. (b) Find an arbitrage-free price of call option on the maximum of S1, S2, S with exercise price K = 2. Is this the unique arbitrage-free price? Problem 3. Consider a single-period model with So = (0,1, , )' and 1 1 1 1 D= 0 1 0 3 1 0 0 0 0 1 0 0 (a) Show that the model is arbitrage-free. (b) Find an arbitrage-free price of call option on the maximum of S1, S2, S with exercise price K = 2. Is this the unique arbitrage-free price

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