Consider a simple one-period binomial framework, where a stock currently trading at $45 per share may end up being worth either ST=$55 or ST=$35. This stock does not currently pay dividends, and the riskless rate per period is rf=2% (simple).

(i) What is the price of a derivative security that pays ST in one period? (40 points)

(ii) What is the probability under the risk-neutral measure that this stock ends up being worth $55? (40 points)

(iii) What is the probability under the physical measure?

Answer rating: 100% (QA)

To determine the price of the derivative security and the probabilities under both the riskneutral m... View the full answer