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Assume that the stock price for ABC follows a binomial lattice. Also assume that the lattice has a multiplicative structure. The stock moves up by
Assume that the stock price for ABC follows a binomial lattice. Also assume that the lattice has a multiplicative structure. The stock moves up by a multiple of u=4/3 or down by a multiple of d=3/4, with equal probability. Let S0=10 denote the initial value of the stock and Sn its value after n-steps. There is also a risk-free asset available with rf=0.
For a one-period model (S0 -> S1), find the state prices u and d as well as the risk neutral probabilities qu and qd.
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