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Mathematics - Mathematical Economics and Finance

Mathematics - Mathematical Economics and Finance

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Published by: JadMadi on Nov 22, 2010
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11/07/2011

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Let x(k) be the vector of payoffs in the various possible states on a European call
option on aggregate consumption with one period to maturity and exercise price
k.
Let{1,2,...,L}be the set of possible values of aggregate consumption C(ω).
Then payoffs are as given in Table 5.1.
This all assumes

1. identical probability beliefs

2. time-additivity of u

3. state-independent u

Revised: December 2, 1998

CHAPTER 5. CHOICE UNDER UNCERTAINTY

93

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