Problem 2 Consider an economy in which there are two dates t = 0 and...
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Problem 2 Consider an economy in which there are two dates t = 0 and t = 1, and two possible states, i = 1 and i = 2, at t = 1, which occur with equal probability, so that 11 = 72 = 1/2. In this economy, two "complex" assets are traded. The first sells for price Pi = 2 at t = 0 and makes payoffs of Z1 = 2 in state i = 1 at t = 1 and Z} = 4 in state i = 2 at t = 1. The second sells for P. = 1.25 at t = 0 and makes payoffs Z) = 1 in state i = 1 at t = 1 and Z3 = 3 in state i = 2 at t = 1. a. Use this information to compute the price q' at t = 0 of a contingent claim that pays off one in state i = 1 at t = 1 and zero in state i = 2 at t = 1 and the price q- at t = 0 of a contingent claim that pays off zero in state i = 1 at t = 1 and one in state i = 2 at t = 1. b. Use your answers from part (a), above, to compute the price PO at t = 0 of a bond that pays off Z} = 1 in state i = 1 at t = 1 and 2 = 1 in state i = 2 at t = 1. c. Use your answers from part (a), above, to compute the price PO at t = 0 of a share of stock that makes no dividend payments, but can be sold for P. = 2 in state i = 1 at t = 1 and P2 = 3 in state i = 2 at t = 1
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