1) Consider a world in which there are only two periods: period 0 and period 1 and three
possible states of the world in period 1 (a good weather state, a fair weather state, and a
bad weather state). Also, apples are the only product produced in this world, and they
cannot be stored from one period to the next. The following abbreviations will be used:
PA = apple in the present period (i.e., present apple), GA = good weather apple in the
next period, FA = fair weather apple in the next period, BA = bad weather apple in the
Suppose that an apple tree firm o↵ers for sale a bond and stock. The apple tree
produces 80 GA, 50 FA, and 25 BA. The bond pays 20 GA, 20 FA and 20 BA. The stock
pays 60 GA, 30 FA and 5 BA. The price of the bond is 18 PA, and the price of the stock
is 22 PA. In addition, security C, D, and E are traded for 31 PA, 11 PA, and 10 PA
respectively. Security C pays 70 GA, 40 FA, and 15 BA. Security D pays 30 GA, 15 FA,
and 2.5 BA. Security E pays 40 GA, 10 FA, and 0 BA.
1.1) Find the arbitrage-free price of the atomic securities.
1.2) Calculate the arbitrage-free price of an apple tree. Verify it equals the price implied
by the firm’s securities.
1.3) Calculate the discount factor and explain its economic interpretation. How is it
related to the risk-free interest rate?
1.4) An investor wants a security that will pay 30 GA, 30 FA, and 50 BA in period 1.
Construct such a security and determine its arbitrage-free price.
1.5) Compute the arbitrage-free price of a security that will pay 45 GA, 15 FA, and 0 BA
in period 1. This is not necessary to solve the problem, but note that this security is
equivalent to a European call option to buy the stock at a strike price of 15 in period 1.
1.6) Design a profitable arbitrage strategy if security C costs 32 PA instead.
2) Consider another world similar to the one considered in Question 1 except there is a
new set of atomic prices involving dealers.
2.1) Dealer I is willing to trade 0.15PA for 1GA (or vice versa), and dealer II is willing
to trade 1GA for 0.6FA (or vice versa) and dealer III is willing to trade 1FA for 0.5BA.
a) What is the arbitrage-free price of a BA in terms of PA? b) What is the arbitrage-free
2.2) In addition, dealer IV is willing to trade 1 PA for 4 BA (or vice versa). Are there
arbitrage opportunities? If so, design a profitable arbitrage strategy.
2.3) Suppose now there are transaction costs. The four dealers have the following bid-ask
Dealer I: sell 1PA for 7GA
buy 1PA for 5GA
Dealer II: sell 1GA for 0.7FA
buy 1GA for 0.5FA
Dealer III: sell 1FA for 0.6BA
buy 1FA for 0.4BA.
Dealer IV: sell 1PA for 5BA
buy 1PA for 3BA.
Are there arbitrage opportunities now? Explain.
2.4) Optional (Not graded): You have been hired by a financial investment company
to write a MATLAB script that detects whether there is an arbitrage opportunity here,
and if there is, tells the company of how to take advantage of it, and calculates the payo↵
in terms of present apples. The program should only need the bid and ask prices of each
of the dealers.
3) Explain the relationship between Arbitrage and the Law of One Price in financial markets.
Compare the latter with examples of Law of One Price in other areas of economics,
and discuss the limitations of this so-called “law”.
Current market interest for knitwear is included with the quality and aggressive estimating of items. There is a nearby rivalry between the makers and advertisers to hit the best deal and offer limited time rebates to purchasers. Merciless rivalry has influenced makers to offer multi-to pack items at modest costs. Improvements in weaving, and propelled medications, for example, advanced printing, lustrous thwart prints, inkjet printing, rushing, and consume outs have warmed the market. New sewing machines have opened up potential outcomes up to this point into obscure fragments, for example, specialized material, for example; items, for example, fishnet, natural product net, shade net and composite items. The Smart Fabrics and Interactive Textiles market will come back to development, achieving an estimation of US$1.8bn by 2015, as per new research by Global Industry Analysts (GIA). (just-style.com)It appears that the restoration of financial development, a recuperation of shopper certainty, item advancements and supportability would all return development on track. Then again, interest for special item offerings, served by unexplored, creating markets, will manage development. It can be securely accepted that the knitwear the business lifecycle is at the develop arrange as appeared in the figure beneath. As indicated by GIA, the cozy clothing industry is characterized by new texture advancements, incorporating developments in elegant and agreeable article of clothing outlines. The report found that opposition inside the business had brought about falling costs and a move underway, inciting producers to grow their activities into South America, Central Europe and Asia (Network). Europe is distinguished as the single biggest territorial market for knitwear, despite the fact that the US; they overwhelm worldwide knitwear area with a 65% piece of the pie (LTD). Asia Pacific is at present developing to be a promising business sector for the same. Amid the retreat, the Asia-Pacific market was floated by fast development in China, India, Korea, Indonesia and Taiwan. The worldwide knitwear advertise is focused and divided. The monetary emergencies have limited the hole between the upper and lower end of the market with style separation nearly vanishing.(Ltd.) With progressions in the business in the current years, RadiciGroup is presenting CornLeaf, a 100% biodegradable arrangement colored ceaseless yarn. Created by Noyfil SA, the yarn is produced using Ingeo, a polylactic corrosive (PLA) polymer got from sustainable vegetable assets. Contrasted with conventional coloring and completing procedures, the assembling of CornLeaf requires less water and vitality utilization as arrangement coloring innovation is incorporated into the turning procedure. CornLeaf lighter than other common filaments, and has relentlessness practically identical to other engineered strands. As indicated by RadiciGroup, the yarn additionally has more noteworthy hygroscopicity contrasted with manufactured yarns and is speedier drying than characteristic strands. RadiciGroup's yarn is accessible in a scope of lightfast, wash-safe hues proposed for use in insinuate wear, decorations and purchaser merchandise. (W. T. Ltd.) Organization Information: Sana Hastakala (P) Ltd. fundamental office, that houses preparing, item plan and advancement, and retail outlet, is arranged in Kupondole, Kathmandu, Nepal. The address is: G 10/113, Kupondole, Kathmandu, Nepal Relating address: P.O. Box No. 3901, Kathmandu Nepal Sana Hastakala (SH), when meant English, actually signifies "Little Handicrafts." This organization was set up by aggregates of craftsmanship organizations in Nepal to empower the nearby craftsmen and makers to take an interest in creating high quality products and offer them abroad. In 1989, United Nation's International Children Emergency Fund (UNICEF, now known as United Nation's Children's Funds) gave specialized and monetary help, notwithstanding aids from nearby handiwork organizations, to dispatch SH. Following a year, the association could maintain without anyone else and, however enrolled as non-government association with Government of Nepal, now is a private restricted organization. SH endeavors to "cultivate the resurgence of customary specialty abilities and in addition applying present day systems keeping in mind the end goal to create pay for under favored art makers who are generally ladies" (Sana_Hastakala). SH has in excess of 1,500 individual makers, and works together with 80 makers gatherings. Pay is dispersed among makers and representatives. Benefits, likewise, fortify the association and fund group advancement activities. The people group advancement subsidize is utilized to help make makers in buying crude materials and gear, and give abilities preparing (SanaHastakala_Producers). SH has been proactive in setting up reasonable exchange Nepal and is the establishing individual from neighborhood part - Fair Trade Group Nepal. In spite of the fact that numerous associations have given meaning of reasonable exchange, the definition offered by World Fair Trade Organization (WFTO) has been generally acknowledged. It expresses that "Reasonable Trade is an exchanging organization, in view of discourse, straightforwardness and regard that look for more noteworthy value in universal exchange. It adds to maintainable advancement by offering better exchanging conditions to, and securing the privileges of, minimized makers and specialists - particularly in the South" (WFTO). There are ten gauges for reasonable exchange and the rundown incorporates "stipulations about work conditions, sexual orientation value, ecological contemplations, and straightforwardness to give some examples" (Weber). Reasonable Trade Group Nepal (FTG Nepal) is "a consortium of reasonable exchanging associations working with the expect to inspire financial status of underprivileged and minimized makers of Nepal" (FTGN "About Fair Trade Group"). SH commitment to social advancement has been featured in periodicals. In 2007, World Fair Trade Day distributed arrangement of contextual analyses on "Why Kids Need Fair Trade" that exemplified how SH has helped Babita Rajbhandari, who had been already prepared in SH, to instruct her girl Boibha after her better half passed away (WFTD). Keeping in mind the end goal to expand consciousness of the reasonable exchange, SH frequently advances instructive projects at neighborhood establishments that offer social work courses. To give hands-on understanding of reasonable exchange, SH gives two 8-month long entry level positions each year to understudies from the schools (Sana_Hastakala "Polcies and Procedures; FTGN Annual Activity Report). SH has two outlets situated in Kupondole and Lazimpat. Their yearly turnover in 2009 was NRs. 40.5 million (CAD 550,000), sends out representing 78% and local for 22% of offers. Data in regards to which classes contribute most to the deals was not uncovered; Japan is the main shipper of knitwear items (Sana_Hastakala "Polcies and Procedures"). Numerous promoters of reasonable exchange have related with SH to advance nearby high quality items in the worldwide market; most quite is Ten Thousand Villages, which has 75 retail locations in the United States of America (TenThousandVillages_USA) and 49 stores crosswise over Canada (TenThousandVillages_Canada). As promoter of reasonable exchange, SH will give leaflet that features the exercises of SH, and access to stock makers and assembling focuses will be given. The outsider examination can be organized, yet the purchaser needs to give the cost of employing outer office (Sana_Hastakala "Polcies and Procedures"). Sana Hastakala has site http://www.sanahastakala.com that gives data to the items, and the administrations gave by the association and data on Nepalese painstaking work. The site, be that as it may, needs electronic requesting framework. This is because of the absence of laws for online business (Sana_Hastakala "Polcies and Procedures"). SH as of late won "Best Entrepreneur Award" given by Federation of Handicraft Association of Nepal for their commitment in "item advancement, work creation, fare and deals advancement, mechanical, administration and ecological upgrades, socially mindful exercises, and support to other craftsmanship business visionaries and purchasers" (WFTO-Asia).>GET ANSWER