Consider a CRR model with T=2,S 0 =$100,S 1 =$200 or S 1 =$50, and an associated
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Question:
(a) Draw the binary tree and compute the arbitrage free initial price of the European contingent claim at time zero.
(b) Determine an explicit replicating strategy for this contingent claim.
(c) Suppose that the option in (a) is initially priced $2 below the arbitrage free price.
Describe a strategy (for trading in stock, bond and the ECC) that is an arbitrage.
Related Book For
Fixed Income Securities Valuation Risk and Risk Management
ISBN: 978-0470109106
1st edition
Authors: Pietro Veronesi
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