Assume a finite state economy with three assets whose payoff matrix is given by
|
$110 |
$100 |
$48 |
|
|
X = |
$110 |
$50 |
$40 |
|
$110 |
$40 |
$36 |
- Is there a risk-free asset in the market?
- Suppose that asset prices are $100, $70, and $40. Is there an arbitrage opportunity in the market?
- Suppose there is an asset that hedges the downside risk with $10 payoff in the third (down) state and nothing in other two states. What should the price of this asset be?
- What are the risk-neutral probabilities?
- Using the risk-neutral valuation approach, recalculate the asset that hedges the downside risk with a $10 payoff in the third (down) state and nothing in other two states.