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Hello! Can you please help me solve the exercise above? Thank You! 2. In a binomial model with where the underlying pays no dividend, the
Hello! Can you please help me solve the exercise above? Thank You!
2. In a binomial model with where the underlying pays no dividend, the risk-neutral proba- bility is erdt d p= u-d where u = povot and d=1/u. (a) Notice that p can take many values. What is the condition for st such that p and 1-p constitute a probability distribution? (b) When there is a continuous-time dividend rate q, the risk-neutral probability is er-9)dt - d p= u-d In other words, in the p-world, the stock price must move up with a smaller prob- ability to justify the valuation of the risk-neutral investor (or the expected return from the sto must be less). Does this make sense? What is the economic intuition of this result? 2. In a binomial model with where the underlying pays no dividend, the risk-neutral proba- bility is erdt d p= u-d where u = povot and d=1/u. (a) Notice that p can take many values. What is the condition for st such that p and 1-p constitute a probability distribution? (b) When there is a continuous-time dividend rate q, the risk-neutral probability is er-9)dt - d p= u-d In other words, in the p-world, the stock price must move up with a smaller prob- ability to justify the valuation of the risk-neutral investor (or the expected return from the sto must be less). Does this make sense? What is the economic intuition of this resultStep by Step Solution
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