In an economy there are two states of the world and four assets. You are given the following prices for three of these securities in different states of the world:
"Current" prices for A, B, C are 100, 70, and 180, respectively.
(a) Are the "current" process of the three securities arbitrage-free?
(b) If not, what type of arbitrage portfolio should one form?
(c) Determine a set of arbitrage-free prices for securities A, B, and C.
(d) Suppose we introduce a fourth security, which is a one-period futures contract written on B. is its price?
(e) Suppose a put option with strike price K = 125 is written on C.
The option expire in period 2. What is its arbitrage-freeprice?