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Unformatted text preview: TUTORIAL 3– WEEK 4 ECON3107/ECON5106 – Economics of Finance 1. An apple tree firm offers for sale a bond and stock. An apple tree produces 70GA and 45BA. The bond pays 20GA and 20BA. The stock pays 50GA and 25BA. The price of the bond is 18PA, and the price of the stock is 30PA. (i) Construct and graph the opportunity set for future apples per present apple. Plot the bond and stock on the opportunity set. (ii) Holding the payments made by both the bond and stock in each state fixed, and the price of the bond fixed, calculate the range of prices of the stock that generate positive prices for both the atomic securities. (iii) A new security X appears on the market that pays 10GA and 35BA and has a price of 24PA. Plot this security on the opportunity set. Does it provide any arbitrage opportunities? If so, design a profitable arbitrage strategy. (iv) Another security Y appears on the market that pays 50GA and 30BA and has a price of 40PA....
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This note was uploaded on 07/13/2011 for the course ECON 3107 at University of New South Wales.