Consider a two-step trinomial (or ternary) market model (left(S_{t}ight)_{t=0,1,2}) with (r=0) and three possible return rates (R_{t}

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Consider a two-step trinomial (or ternary) market model \(\left(S_{t}ight)_{t=0,1,2}\) with \(r=0\) and three possible return rates \(R_{t} \in\{-1,0,1\}\). Show that the probability measure \(\mathbb{P}^{*}\) given by

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is risk-neutral.

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Introduction To Stochastic Finance With Market Examples

ISBN: 9781032288277

2nd Edition

Authors: Nicolas Privault

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Question Posted: Feb 25, 2024 08:00 AM

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Consider a two-step trinomial (or ternary) market model (left(S_{t}ight)_{t=0,1,2}) with (r=0) and three possible return rates (R_{t}

Question:

P* (R = 1) := , =1/1 P* (Rt = 0):= P* (Rt = 1) 114

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We check that for any P of the form ...View the full answer

Introduction To Stochastic Finance With Market Examples

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