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1. Consider 3-step binomial model with one asset with initial price S(0) = 100. (a) For D=0.9, U - 1.1 and p= }: = (i)

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1. Consider 3-step binomial model with one asset with initial price S(0) = 100. (a) For D=0.9, U - 1.1 and p= }: = (i) Determine the distribution of the price S(t) for t = 1, 2, 3. (4) (ii) Compute the expected price E(S(t)) for t =1,2,3. (4) (iii) Determine the distribution of the return K(t) for t=1,2,3. (4) (iv) Compute the expected return E(K(t)) for t = 1,2,3. (4) (b) Suppose D = 0.9 and p = . Determine all values of U > D for which the expected return is: (i) equal to 100: (2) (ii) smaller than 100; (2) (iii) bigger than 100. (2) (c) Let 0 D for which the expected return is: (i) equal to 100: (2) (ii) smaller than 100; (2) (iii) bigger than 100. (2) (c) Let 0

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