Consider an economy with two dates (t=0,1) and at t=1 there are three states. The following three stocks are traded: x1=(10,0,30) x2=(0,20,40) x3=(20,20,0) The t=0 prices of these stocks are given as follows (p1, p2, p3)=(12, 14, 8) (a) Is there an arbitrage? Suppose an investment firm sells options (b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=8? (c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=12?
Consider an economy with two dates (t=0,1) and at t=1 there are three states. The following three stocks are traded: x1=(10,0,30) x2=(0,20,40) x3=(20,20,0) The t=0 prices of these stocks are given as follows (p1, p2, p3)=(12, 14, 8)
(a) Is there an arbitrage?
Suppose an investment firm sells options
(b) What is the t=0
(c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=12?
Suppose a start-up company wants to go public. The firm has total costs of $100,000 at date t=1 and sales of $140,000 in state 1, $130,000 in state 2, and $220,000 in state 3. The firm wants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of the total profits of the firm.)
(d) The underwriter suggests an IPO price of $60 per share. Will this IPO be successful, i.e. will there be a positive demand for the shares?
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