The net price factor for the series of trade discounts if Something’s Fishy, a pet shop, get a 30 / 20 / 12 series of trade discount from the Clearview Fish Tank Company. In June, the shop ordered merchandise with a list price of $ 3 , 500 . In September, the shop placed an additional listing order for $ 5 , 800 .

Question

10. In the general single period market model with = {W1, W2, W3}, one risky asset, S, and a money market account, we have So = 4 for the risky asset. Moreover, the effective rate of interest on the money market account is 5% and at time t = 1 we have W1 W2 W3 S₁ 100 50 40 21 21 21 (a) Calculate all risk-neutral probability measures for this model. [4 Marks] (b) State if the model is arbitrage-free. Give a brief reason for your answer. [2 Marks] (c) A large bank has designed an investment product with payoff X at time t = 1. Given W₁ W2 W3 X 0 1 1.5 show that X is an attainable contingent claim. [4 marks]

Answer 1

Question

Chapter 7.III, Problem 7TIE

(a)

To determine

To calculate: The net price factor for the series of trade discounts if Something’s Fishy, a pet shop, get a 30/20/12 series of trade discount from the Clearview Fish Tank Company. In June, the shop ordered merchandise with a list price of $3,500. In September, the shop placed an additional listing order for $5,800.

(b)

To determine

To calculate: The net price for merchandise purchased in June, if Something’s Fishy, a pet shop, get a 30/20/12 series of trade discount from the Clearview Fish Tank Company. In June, the shop ordered merchandise with a list price of $3,500. In September, the shop placed an additional listing order for $5,800 and net price factor is 49.28%

(c)

To determine

To calculate: The net price for the merchandise purchased in September if Something’s Fishy, a pet shop, get a 30/20/12 series of trade discount from the Clearview Fish Tank Company. In June, the shop ordered merchandise with a list price of $3,500. In September, the shop placed an additional listing order for $5,800 and net price factor is 49.28%.

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