a) An investor is given the following information:PayoffState 1 State 2SecurityMarket prices(s=1)(s=2)X£15£20PJ = £19Y£25£10PK = £25Explaining the method(s) and the underlining concept(s), how could the investor use Arrow-Debreu pure securities to replicate the payoff of security X and security Y? What are theprices of pure security 1 and pure security 2? b) Explaining the method, compute the capital weights on portfolios of X and Y assets thatreplicate the payoffs of pure securities 1 and 2. Further consider that an investor has aninitial wealth of £1000 - he can short-sell securities; however, he must be able to meet allclaims under the occurrence of either state. Explaining the method, what is the maximumnumber of security Y he could sell (short selling) to buy security X? (investor may buyfractions of shares).

Replicating Payoffs with the Use of Arrow-Debreu Securities: a) Approach and Fundamental…

Answered: a) An investor is given the following…

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter8: Securities Law Considerations When Obtaining Venture Financing

Section: Chapter Questions

Problem 1gM

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