Question
You have a stock in the one-period binomial model such that S0= 4, S1(H) = 8, S1(T) = 2,and r= 1.5. (a) Show that this
You have a stock in the one-period binomial model such that S0= 4, S1(H) = 8, S1(T) = 2,and r= 1.5.
(a) Show that this setup violates the no-arbitrage assumption.
(b) Show how to extract arbitrage by explicitly defining a portfolio(X,) such that X0<0 while X10.
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Entrepreneurial Finance
Authors: J . chris leach, Ronald w. melicher
4th edition
538478152, 978-0538478151
