Answer the following questions concerned with the alternative procedures for construct- ing trees in Section 17.4

(a) Show that the binomial model in Section 17.4 is exactly consistent with the mean and variance of the change in the logarithm of the stock price in time Az.

(b) Show that the trinomial model in Section 174 is consistent with the mean and variance of the change in the logarithm of the stock price in time Ar when terms of order (ar) and higher are ignceed.

(c) Construct an alternative to the trinomial model in Section 17.4 so that the prob abilities are 1/6, 23, and 1/6 on the upper, middle, and lower branches emanating from each node. Assume that the branching is from 5 to Su, S, or Sd with Match the mean and variance of the change in the logarithm of the stock price exactly.