# Question: Suppose that u e r h Show that there is an

Suppose that u < e(r−δ)h. Show that there is an arbitrage opportunity. Now suppose that d >e(r−δ)h. Show again that there is an arbitrage opportunity.

Many (but not all) of these questions can be answered with the help of the BinomCall and BinomPut functions available on the spreadsheets accompanying this book.

Many (but not all) of these questions can be answered with the help of the BinomCall and BinomPut functions available on the spreadsheets accompanying this book.

## Answer to relevant Questions

Let S = $100,K = $95, r = 8%, T = 0.5, and δ = 0. Let u = 1.3, d = 0.8, and n = 1. a. Verify that the price of a European put is $7.471. b. Suppose you observe a put price of $8. What is the arbitrage? c. Suppose you ...Let S = $100, K = $95, σ = 30%, r = 8%, T = 1, and δ = 0. Let u = 1.3, d = 0.8, and n = 2. Construct the binomial tree for a European put option. At each node provide the premium, ∆ and B. We saw in Section 10.1 that the undiscounted risk-neutral expected stock price equals the forward price. We will verify this using the binomial tree in Figure 11.4. a. Using S = $100, r = 0.08, and δ = 0, what are the ...Repeat Problem 11.4, only set δ = 0.08. What is the lowest strike price at which early exercise will occur? What condition related to put-call parity is satisfied at this strike price? Consider a bull spread where you buy a 40-strike call and sell a 45-strike call. Suppose S = $40, σ = 0.30, r = 0.08, δ = 0, and T = 0.5. Draw a graph with stock prices ranging from $20 to $60 depicting the profit on the ...Post your question