BOOK: Arbitrage Theory in Continuous Time, Third Edition, Tomas Bjork 8Q: exercise: 7.6 & 7.7; exercise: 8.1 & 8.2; exercise:15.1 exercise: 23.1, 23.2 and 23.3. Handwriting solution is NOT...

7.6Ans.
We know that
dB(t) =rB(t)dt
dS(t1)=S(t1)α(t,S(t1))dt+S(t1)σ(t,S(t1))dWbar(t1)…………..1
dS(t0)=S(t0)α(t,S(t0))dt+S(t0)σ(t,S(t0))dWbar(t0)…………..2
We know that
ᴨ(t;ϕ) = X = F(t,S(t) =
7.7Ans.
Arbitrage free price option , in consideration of the given condition will be
VT = exp (-Rt) E[(ST-K)+]
8.1
a)
the model is arbitrage free when N<=S
b)
the model is complete, N>=S
c) unique arbitrage...