Exercise 4 (Each part 0.25 mark. Exercise 6.4.1 of Blyth). Which of the followin

Question

Exercise 4 (Each part 0.25 mark. Exercise 6.4.1 of Blyth). Which of the following neces sarily imply a violation of the no-arbitrage principle? Assume T > 0 and > 0. (a) A portfolio which has zero value today, always non-negative value at T, and positive value at T for some sample outcomesw with P))>0 (b) A portfolio which has zero value today and expected positive value at T (c) A portfolio which has value - today and zero value at T (d) A portfolio which has value -c today and expected positive value at T e) A portfolio which has zero value today and value e at 7 (f A portfolio which has zero value today and positive value at T for some sample out- comes with positive probability. (g A portfolio which has zero value today, always non-negative value at T, and positive value at T for some sample outcomes. (h) A portfolio which has zero value today, always non-negative value at T, and expected positive value at T

Explanation / Answer

Answer A is correct. The above assumption holds true only for no arbitrage condition

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