Question

Repeat the previous problem for n = 50. What is the risk-neutral probability that S1< $80? S1> $120? We sawin 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.


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  • CreatedAugust 12, 2015
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