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Question: Consider a one-period model with three states and two assets, a risk-free bond and a stock. Assume that

B₀ = 100, B_T = 105, S₀ = 10, and S_T ∈ {8, 9, 12}

(a) Determine if the model is arbitrage-free and complete.

(b) Find the general solution for the state prices: a unique solution if the market is complete, or a range of solutions if the market is incomplete.

(d) Suppose the market price of the call option is zero. Construct an arbitrage portfolio.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M92583993

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