Question
Problem 1. Consider the Binomial Asset Pricing Model, with u = 2, d = 1/2, r = 1/4 and S0 = 4. Consider a European
Problem 1. Consider the Binomial Asset Pricing Model, with u = 2, d = 1/2, r = 1/4 and S0 = 4. Consider a European Call Option with strike price K = 9, maturing at time N = 3. (1) State the non arbitrage condition and compute the Risk-neutral probabilities. (2) Using a backward recursion, find the arbitrage-free price of the option at time 0, i.e. V0 under the risk-neutral probability.
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Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
16th edition
125927716X, 978-1259687969, 1259687961, 978-1259277160
