Question: Repeat Problem 13 but this time assume that all the
Repeat Problem 13, but this time assume that all the probabilities are risk-neutral probabilities, which means the cost of capital is always the risk-free rate and risk-free rates are as follows: The current interest rate for a risk-free perpetuity is 8%; in one year, there is a 64.375% chance that all risk-free interest rates will be 10% and stay there forever, and a 35.625% chance that they will be 6% and stay there forever. The current one-year risk-free rate is 7%.
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