Suppose there are two states of nature in the future.

Suppose there are two states of nature in the future.

Question

Suppose there are two states of nature in the future. In the asset market, there are the two
continge
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Suppose there are two states of nature in the future.

Question

Suppose there are two states of nature in the future. In the asset market, there are the two
contingent claims, one for each state. There’s a third security with payoffs x=(4,2). Suppose the
prices of the contingent claims are both 1/2: p(c(s1))= p(c(s2))/2. The price of the third security is
4.

a) What is the payoff matrix X of the asset market? Is the market complete or incomplete? Why?
Is there any redundant security?

b) What is the price vector p of the securities market?

c) The law of one price says that the securities with the same payoffs must have the same price.
Does the LOOP hold here? Why or why not?

d) Find an arbitrage portfolio. Show that one can possibly receive some positive payoffs without
any cost or risk using the arbitrage portfolio.

Suppose there are two states of nature in the future.

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