Question 3 (10+ 10+20 points). A stock pays a continuous dividend with rate S, and in one year the stock price will be multiplied by u = 1.2 or d=0.9. Annual risk-free continuously compounded interest rate is r=0.02. Assume binomial model holds and standard notations apply. The stock is currently sold at 100. One period corresponds to one year. i) Briefly explain what the risk-neutral probability is in no more than 3 sentences). How is it related to the physical (i.e. historical) probability p of an upward move? ii) What is the expression of p* in this model? What happens if e-8