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. 1. Consider a financial market with two assets over the time interval (0,T]. Trading can take place at n+1 discrete time points to, tn where ti = iA, i = 0,1, ..., n, and A=T is the time distance between trading times. The first asset is risk- free with interest rate era > 0 per time period. The second asset is a stock whose price in period i (= 1, ..., n) is given by Sia = S(0-1)A exp (a + Bui), where a and are coefficients and vi, i 1, .., n, are i.i.d. with P(Vi = -1) = P1, P (Vi = 0) = P2, P(V; = 1) = P3. Here, p1 + P2 + P3 = 1. (d) [5 pts) Let Q be an alternative measure characterised by Q (vi = -1) = (1, Q (V; = 0) = 42, Q (vi = 1) = 93, = with q +92 +93 : 1. When is Q a risk-neutral measure? Is there a unique risk-neutral measure in this market? Explain. . 1. Consider a financial market with two assets over the time interval (0,T]. Trading can take place at n+1 discrete time points to, tn where ti = iA, i = 0,1, ..., n, and A=T is the time distance between trading times. The first asset is risk- free with interest rate era > 0 per time period. The second asset is a stock whose price in period i (= 1, ..., n) is given by Sia = S(0-1)A exp (a + Bui), where a and are coefficients and vi, i 1, .., n, are i.i.d. with P(Vi = -1) = P1, P (Vi = 0) = P2, P(V; = 1) = P3. Here, p1 + P2 + P3 = 1. (d) [5 pts) Let Q be an alternative measure characterised by Q (vi = -1) = (1, Q (V; = 0) = 42, Q (vi = 1) = 93, = with q +92 +93 : 1. When is Q a risk-neutral measure? Is there a unique risk-neutral measure in this market? Explain

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