Question 1. Understanding market completeness/incompleteness. There are four assets and four states: where k is a real number. a₁ = [10-k 40-4k 0 0]' 81₂ = 0 2+2K 2+ +24]' [10 40-4k 0 0]' nj 0 1 + k 11+2k]' aj 1 (a) Write the payoff matrix A(), for general k. (b) For what values of k is the market complete? (c) Consider the payoff b) = [11+k4 1+k 11+2k]'. For what values of k can this payoff be hedged perfectly (i.e., with no hedging error)?
Question 1. Understanding market completeness/incompleteness. There are four assets and four states: where k is a real number. a₁ = [10-k 40-4k 0 0]' 81₂ = 0 2+2K 2+ +24]' [10 40-4k 0 0]' nj 0 1 + k 11+2k]' aj 1 (a) Write the payoff matrix A(), for general k. (b) For what values of k is the market complete? (c) Consider the payoff b) = [11+k4 1+k 11+2k]'. For what values of k can this payoff be hedged perfectly (i.e., with no hedging error)?
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
Problem 1PS
Related questions
Question
![Question 1. Understanding market completeness/incompleteness.
There are four assets and four states:
a, = [10 - k 40- 4k 0 0)'
%3D
n2 = [0 0 2+ 2k: 2 + 2k]
[10 40 – 4k 0 0'
n, = [0 0 1+ k 11 + 2k]'
where k is a rcal number.
(n) Write the payoff matrix A4), 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]'.
%3D
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%2F0e3aa281-83f7-4c8c-8094-cf2586b50202%2F56ea9742-1f93-4eb5-ab6c-cf68de55c078%2F1s3b76_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 0)'
%3D
n2 = [0 0 2+ 2k: 2 + 2k]
[10 40 – 4k 0 0'
n, = [0 0 1+ k 11 + 2k]'
where k is a rcal number.
(n) Write the payoff matrix A4), 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]'.
%3D
For what values of k can this payoff be hedged perfectly (i.e., with no hedging
error)?
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Foundations Of Finance](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![Corporate Finance (The Mcgraw-hill/Irwin Series i…](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education