Intermediate Financial Theory. Book • 3rd Edition • Authors: Jean-Pierre Danthine and John B Donaldson. Browse book content. About the book. Search in. By Jean-Pierre Danthine and John B. Donaldson; Abstract: Targeting readers with backgrounds in economics, Intermediate Financial Theory, Third Edition. Buy Intermediate Financial Theory (Academic Press Advanced Finance) on by Jean-Pierre Danthine (Author), John B. Donaldson (Author).

Author: | Samugar Dudal |

Country: | Lesotho |

Language: | English (Spanish) |

Genre: | Science |

Published (Last): | 12 July 2007 |

Pages: | 162 |

PDF File Size: | 8.75 Mb |

ePub File Size: | 17.74 Mb |

ISBN: | 748-8-85441-584-1 |

Downloads: | 41140 |

Price: | Free* [*Free Regsitration Required] |

Uploader: | Kikinos |

## Intermediate Financial Theory

Options and market completeness. To price a complex security from A-D prices, make up the portfolio of AD securities providing the same state-by-state payoff as the security to be priced and check what is the cost of this portfolio. Are we far from complete markets? The price process is anv in e.

### Solutions to Exercises

The risk averse agent is exposed to significant risk at date 1. Agents will be happy to store the commodity for two reasons: How could it be? Use the latter for pricing other assets or arbitrary cash flows.

Thus, given two distributions with the same mean, the one with the higher variance is less desirable; similarly, given two distributions with the same variance, the one with the greater mean return is preferred.

Pareto set is the lower side and the right side of the box, or the upper side and the left side, depending on which MRS is higher. This statement is valid even if no A-D security is traded.

The CCAPM makes a full investors homegeneity assumption but does not require specific ginancial functions. Thus, mean-variance dominance does not imply FSD. The certainty equivalent is defined by the equation: Let the foreign government issue 1 unit of the bond paying 2. Of course, the riskneutral probabilities are the same as in b.

Without loss of generality consider asset 1. There are two ways to solve it. The matrix is the same at each date. An A-D security is an asset that pays out 1 unit of consumption in a particular state of the world. This is a subject of passionate debates that cannot be resolved here.

The two other cases follow immediately. Yes, in a non-expected utility world where there is a preferences for gambling. For an equally weighted portfolio: For agent 2, the marginal utility of a unit of consumption in period 1 is less than the marginal utility of a unit in period 0. This could have been expected because the logarithmic utility function is very curved at low values, and flattens out rapidly, i.

### EconPapers: Intermediate Financial Theory

The implied allocations are thus: The most the agent would be willing to pay is 1. The remaining demand functions can be obtained using the same steps.

The return on the market portfolio could be one of them, however. Both models would be compatible if the market portfolio were simply another way to synthesize the several factors identified by the APT: At that price, check that the demand for asset Q by agent 1 is zero: Once again; both agents are better off after trade. The introduction of more securities of either type will reduce the cost to him of doing that.

Either way, the problems of the agents and their F. A-D pricing focuses on the concept of states of nature and the pricing of future payoffs conditional on the occurrence of specific future states. In part b we saw that pricing via A-D prices, risk-neutral probabilities, and pricing kernel are essentially the same. Utility function U c 1c 2: As a result the prices of A, C will rise and their expected returns fall.

This is not entirely surprising as the security payoffs are more useful to him for consumption smoothing. What is affected are the market clearing conditions: The essential differences are the following: Now only 1,0 is traded. Either way a Pareto optimum is achieved since, with no short sales constraints, the market is complete. Apply this result to the R. This is not a surprise since the new utility function is a monotone transformation logarithm of the utility function used originally.

The maximization problem for the speculator’s is: Math —1, Fall Solutions to the Final Examination. As a consequence, the increase in price may well lead to a fully rational increase in demand. Lottery L is preferred to the ”sure lottery” P. There are many Pareto optima. In general one security is not sufficient to complete the markets when there are two future states.

P is preferred to L under transformation g. You may want to re-read the concluding comments of Chapter 1 at this stage.