Consider a two-date economy where there are three states of the world at date 1. Consumption per capita at date 1 will be $5, $10, or $15. A security that pays one unit of consumption next period is worth $8 today. The risk-free security pays a gross return of 1.1. A call option on per capita consumption with an exercise price of $12 costs $1. The probabilities of the three states are 0.3, 0.4, and 0.3, respectively. Are markets complete? If yes, what are the state prices? a. b. Price a put option on per capita consumption with an exercise price of $8. Can you derive the risk-neutral probabilities? c.

Consider a two-date economy where there are three states of the world at date 1. Consumption per capita at date 1 will be $5, $10, or $15. A security that pays one unit of consumption next period is worth $8 today. The risk-free security pays a gross return of 1.1. A call option on per capita consumption with an exercise price of $12 costs $1. The probabilities of the three states are 0.3, 0.4, and 0.3, respectively. Are markets complete? If yes, what are the state prices? a. b. Price a put option on per capita consumption with an exercise price of $8. Can you derive the risk-neutral probabilities? c.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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