We build a model for asset prices S, at times t = 0, 1, 2, 3,...

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We build a model for asset prices S, at times t = 0, 1, 2, 3, 4. Today, So = 10. For each case A, B, C below, answer the following questions: i) What are the possible values of S₁ within this model? ii) What is the expected mean and variance of S₂? a) Suppose that prices can go either up $1 or down $1 each period. Assume that the probability of an up-move is 0.45 at each step, independently of everything else (this is a random walk model). b) Now suppose that prices can (this is an example of a trinomial tree): with prob. 0.4 with prob. 0.35 with prob. 0.25 go up $1 stay flat go down $1 c) Now suppose that each period prices either go up by 10% with probability 0.55, or down by 10% with prob. 0.45 (this is a binomial tree) We build a model for asset prices S, at times t = 0, 1, 2, 3, 4. Today, So = 10. For each case A, B, C below, answer the following questions: i) What are the possible values of S₁ within this model? ii) What is the expected mean and variance of S₂? a) Suppose that prices can go either up $1 or down $1 each period. Assume that the probability of an up-move is 0.45 at each step, independently of everything else (this is a random walk model). b) Now suppose that prices can (this is an example of a trinomial tree): with prob. 0.4 with prob. 0.35 with prob. 0.25 go up $1 stay flat go down $1 c) Now suppose that each period prices either go up by 10% with probability 0.55, or down by 10% with prob. 0.45 (this is a binomial tree)

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A i The possible values of S1 are 9 and 11 ii The expecte... View the full answer