Exercise 4

In the fourth exercise session, we worked with risk-neutral probabilities in finite one-period models. We solved the risk-neutral pricing equations and used them to determine whether there were no, one, or many risk-neutral measures. We also used these equations as no-arbitrage tests.

Exercise set:

• Exercise Set 4

Solution set:

• Solution set for Exercise 4

Material used:

• Pliska, Sec. 1.3, Risk Neutral Probability Measures, pp. 11–15.

Exercise Set 5 for Thursday 1 October