We saw in Section 10.1 that the undiscounted risk-neutral expected stock price equals the forward price. We will verify this using the binomial tree in Figure 11.4.
a. Using S = $100, r = 0.08, and δ = 0, what are the 4-month, 8-month, and 1-year forward prices?
b. Verify your answers in (a) by computing the risk-neutral expected stock price in the first, second, and third binomial period. Use equation (11.12) to determine the probability of reaching each node.