Question 1. Understanding market completeness/incompleteness. There are four assets and four states: a₁ = [10-k 40-4k 0 0]' a= [0 0 2+2k 2+2k]' as [10 40-4k 0 o' a= [0 0 1+k 11+ 2k]' where k is a real number. (a) Write the payoff matrix A(), for general k. (b) For what values of k is the market complete?
Question 1. Understanding market completeness/incompleteness. There are four assets and four states: a₁ = [10-k 40-4k 0 0]' a= [0 0 2+2k 2+2k]' as [10 40-4k 0 o' a= [0 0 1+k 11+ 2k]' where k is a real number. (a) Write the payoff matrix A(), for general k. (b) For what values of k is the market complete?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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![Question 1. Understanding market completeness/incompleteness.
There are four assets and four states:
a, = [10 - k 40 - 4k 0 o
az = [0 0 2+2k 2+2k]'
as = [10 40 - 4ko o0'
a = [0 0 1+k 11 + 2k]
%3D
%3!
where k is a real mumber.
(a) Write the payoff matrix A"), for general k.
(b) For what values of k is the market complete?
(c) Consider the payoff
b4) = [11 +k 4 1+k 11+ 2k]'.
For what values of k can this payoff be hedged perfectly (i.e., with no hedging
error)?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F30761b77-41ff-4d68-8d43-2c22211f7b19%2F67795a7a-ea4c-4805-ae96-278eab024aec%2F63v6qc4_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Question 1. Understanding market completeness/incompleteness.
There are four assets and four states:
a, = [10 - k 40 - 4k 0 o
az = [0 0 2+2k 2+2k]'
as = [10 40 - 4ko o0'
a = [0 0 1+k 11 + 2k]
%3D
%3!
where k is a real mumber.
(a) Write the payoff matrix A"), for general k.
(b) For what values of k is the market complete?
(c) Consider the payoff
b4) = [11 +k 4 1+k 11+ 2k]'.
For what values of k can this payoff be hedged perfectly (i.e., with no hedging
error)?
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