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3. Consider a finite market model with T = 2, N = {W1, W2, W3, 64,W5}, and P({wi}) > 0 for i = 1, ...,5. Suppose there are two assets, a riskless asset with price process S = {So, t = 0,1,2} where so = (1 + r) for t = 0,1,2, and some r > 0, and a risky asset with price process S1 = {S}, t = 0,1,2} where s(wi) = 5, s}(wi) = 8, s}(wi) = 9 S (wa) = 5, s}(w2) = 8, S1 (wa) = 7 S(w3) = 5, S}(w3) = 4, S}(w3) = 6 S(wa) = 5, s}(wa) = 4, s}(wa) = 5 S.(w5) = 5, S}(ws) = 4, s}(5) = 2. Let Fo = {0,1}, F1 = o{S, S}} and F2 = 0{S., S1, Sj}. 2. For this problem we use the finite model presented in Exercise 3 (Section 3.7, page 53 of the text), but with r = 0. (a) This model is viable but not complete. Describe all possible EMMS. (b) Consider the European call option X = (S2-5)+. Compute V(X) and V-(X). (c) Is X replicable? (Hint: The answer from (b) will be helpful.] 3. Consider a finite market model with T = 2, N = {W1, W2, W3, 64,W5}, and P({wi}) > 0 for i = 1, ...,5. Suppose there are two assets, a riskless asset with price process S = {So, t = 0,1,2} where so = (1 + r) for t = 0,1,2, and some r > 0, and a risky asset with price process S1 = {S}, t = 0,1,2} where s(wi) = 5, s}(wi) = 8, s}(wi) = 9 S (wa) = 5, s}(w2) = 8, S1 (wa) = 7 S(w3) = 5, S}(w3) = 4, S}(w3) = 6 S(wa) = 5, s}(wa) = 4, s}(wa) = 5 S.(w5) = 5, S}(ws) = 4, s}(5) = 2. Let Fo = {0,1}, F1 = o{S, S}} and F2 = 0{S., S1, Sj}. 2. For this problem we use the finite model presented in Exercise 3 (Section 3.7, page 53 of the text), but with r = 0. (a) This model is viable but not complete. Describe all possible EMMS. (b) Consider the European call option X = (S2-5)+. Compute V(X) and V-(X). (c) Is X replicable? (Hint: The answer from (b) will be helpful.]

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