Suppose that we can describe the world using two states and that two assets are available, asset Kand asset L. We assume the assets' future prices have the following distributions: State Future Prices Asset K Future Prices Asset L Kat state 1 = $25 Lat state 1 = $21 Kat state 2 = $20 Lat state 2 = $27 Let K(1) = $20 denote the time O price of asset K and L(1) = $19 the time 0 price of asset L. (a) Assuming no arbitrage opportunities, what are the values of the unit claims, at time 0? (b) What is the risk-free rate of return that must exist in this market?

Suppose that we can describe the world using two states and that two assets are available, asset Kand asset L. We assume the assets' future prices have the following distributions: State Future Prices Asset K Future Prices Asset L Kat state 1 = $25 Lat state 1 = $21 Kat state 2 = $20 Lat state 2 = $27 Let K(1) = $20 denote the time O price of asset K and L(1) = $19 the time 0 price of asset L. (a) Assuming no arbitrage opportunities, what are the values of the unit claims, at time 0? (b) What is the risk-free rate of return that must exist in this market?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.7P

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