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The answer for case A should be 112.8 for the expectation of S4 and should be 92.237 for case B. Please show all work as
The answer for case A should be 112.8 for the expectation of S4 and should be 92.237 for case B. Please show all work as I'm just confused how to solve it.
Problem 2. We build a model for asset prices St at times t=0,1,2,3,4. Today, S0=100. For each case A, B below, answer the following questions: i) What are the possible values of S4 within this model? ii) What is the expectation of S4 ? Case A: Suppose that prices can go either up $12 or down $10 each period. Assume that the probability of an up-move is 0.6 at each step, independently of everything else (this is a random walk model). Case B: Now suppose that each period prices either go up by 10%(u=1.1) with probability 0.4 , or down by 10%(d=0.9) with prob. 0.6 (this is a binomial tree)Step by Step Solution
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