Exercise 5

Exercise Set 5 covers contingent claims, risk-neutral pricing, replicating strategies, attainability, and complete versus incomplete one-period markets. It also includes an example of arbitrage arising from a mispriced claim. There is no exercise session on Thursday 1 October, so this set is available for independent work.

Exercise set:

• Exercise Set 5

Solution set:

• Solution set for Exercise 5

Material used:

• Pliska, Sec. 1.4, Valuation of Contingent Claims, and Sec. 1.5, Complete and Incomplete Markets; an exercise adapted from the 2023 ordinary exam, Problem 1(a).

Exercise Set 6 for Thursday 8 October