In the binomial model, the up move of the stock is set by parameter u, i.e., the
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In the binomial model, the up move of the stock is set by parameter u, i.e., the stock goes from S at the start of the period to uS at the end of the period if it moves up. Likewise, the down-move parameter for the stock is d. The value of 1 plus the interest rate is specified as R. What is the no-arbitrage relationship between u, d, R? Explain what happens if this relationship is violated.
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