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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)
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 X1 0.
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