Week 2

Question 1

In binomial 2 asset market, what implies existence of q^A (and state)

Answer 1

Question 2

Denote expected value of ratio of 2 assets at time 1 under martingale measure Q

Answer 2

Question 3

Defining characteristic of martingale

Answer 3

Value now is equal to expected value in future

Question 4

Once you have determined martingale measure you can

Answer 4

Price all traded assets with relative price martingales under the same martingale measure (if you choose the same denominator)

Question 5

Process for Pricing 3 assets A,B,C of binomial model

Answer 5

Find q^A for B

write martingale condition for C/A

rearrange to Find C_0

Question 6

No arbitrage => ?

Answer 6

There exists a martingale measure

Question 7

Properties of numeraire asset

Answer 7

• strictly positive in all states
• goes in denominator

Question 8

A complete market?

Answer 8

Terminal value of any asset can be replicated

Assets are linearly dependent and span

Question 9

Market is complete => ?

Answer 9

Martingale measure is unique