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Problem 1 (Two-step binomial model with dividend). (5 pts) Consider a two-step binomial model with So = 100 and returns on the stock U =
Problem 1 (Two-step binomial model with dividend). (5 pts) Consider a two-step binomial model with So = 100 and returns on the stock U = 0.1 and D= -0.2. Let the risk-free return be R= 0 and suppose that the stock pays a dividend of 10 at t = 1 and a dividend of 5 at t = 2. a) (1 pts) Draw the stock price tree. b) (4 pts) Compute the risk-neutral probability and find the price of a European put with strike K = 80 and expiration at t = 2
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