Let S 0 = 20, = 0.3, r = 0.06 and t = 1 week. Construct
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Let S0 = 20, σ = 0.3, r = 0.06 and Δt = 1 week. Construct a 2-week binomial tree (2 steps), use the p = 1/2 method, and calculate the no-arbitrage call price C for K = 21. If the market price CM were 3/2 times C, explain in detail how that could be exploited to make a risk-free profit.
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To calculate the noarbitrage call price C for a European call option with the given parameters and strike price K of 21 using the binomial tree model ...View the full answer
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