Now, consider the following one-period model, with two assets and three possible outcomes: Price at time 0 Price at time 1 Outcome Outcome 2 Outcome 3 Asset 1 55 40 60 88 Asset 2 85 60 120 96 There is also a bank account that pays an interest rate R = 0.2 per period. (b) Write down the set of simultaneous equations that must be satisfied by the risk-neutral probabilities (91, 92 and 93) for this market. (You may assume that such probabilities do indeed exist in this case.)

Now, consider the following one-period model, with two assets and three possible outcomes: Price at time 0 Price at time 1 Outcome Outcome 2 Outcome 3 Asset 1 55 40 60 88 Asset 2 85 60 120 96 There is also a bank account that pays an interest rate R = 0.2 per period. (b) Write down the set of simultaneous equations that must be satisfied by the risk-neutral probabilities (91, 92 and 93) for this market. (You may assume that such probabilities do indeed exist in this case.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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