If the call option were selling at $4, what would you do to create a riskless arbitrage strategy? Explain how the strategy is maintained over the two binomial periods assuming the underlying asset price declines in the first period. Construct a table to demonstrate the exact strategy and the cashflows from the strategy. S0 = 10, T = 2 months, u = 1.5, d = 0.5, r = 0.05, K = 7, D=0.

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Given So10 and T 2 months let us construct a binomial tree This binomial ... View the full answer