Econ 1723 - Pset 1 Solutions.pdf - Ec1723 Fall 2018 Problem...

This preview shows page 1 - 3 out of 8 pages.

Ec1723, Fall 2018: Problem Set 1 Solutions Problem 1 In each of the following situations there is an arbitrage opportunity. For each situation, explain the source of the arbitrage opportunity and how you would trade to exploit it. If you need an explanation of the underlying theory, please view the online module for lecture 1. (a) Asset Price State 1 Payoff State 2 Payoff Asset 1 1 1.5 -0.5 Asset 2 3.5 6 -2
1
Problem 2 Read the article by Lamont and Thaler, “Anomalies: The Law of One Price in Financial Markets.” (a) Why is a negative stub value anomalous?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture