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Suppose the current spot price is $3. With 50 percent of the probability, the spot price will increase or decrease by 1 dollar for first
Suppose the current spot price is $3. With 50 percent of the probability, the spot price will increase or decrease by 1 dollar for first year and then remain the same as shown in the graph below. t=0 t=1 t=2 Pu=0.5 SO=4 SO=4 SO=3 S0=2 - SO=2 Pd=0.5 Please answer the following questions. (a) If the annual discrete compounding risk-free rate is 10%, and the cost of carry offsets the convenience yield exactly, then the future price is equal to the spot price. Please explain. t=0 t=1 t=2 Pu=0.5 F1,2=4 F2,2=4 FO,2=3 F1,2=2 > > F2,2=2 Pd=0.5 Suppose the current spot price is $3. With 50 percent of the probability, the spot price will increase or decrease by 1 dollar for first year and then remain the same as shown in the graph below. t=0 t=1 t=2 Pu=0.5 SO=4 SO=4 SO=3 S0=2 - SO=2 Pd=0.5 Please answer the following questions. (a) If the annual discrete compounding risk-free rate is 10%, and the cost of carry offsets the convenience yield exactly, then the future price is equal to the spot price. Please explain. t=0 t=1 t=2 Pu=0.5 F1,2=4 F2,2=4 FO,2=3 F1,2=2 > > F2,2=2 Pd=0.5
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