Question: There is an old saying that nature abhors a vacuum
There is an old saying that nature abhors a vacuum. The financial equivalent is markets abhor arbitrage opportunities. Explain the central role this principle plays in the binomial model.
Answer to relevant QuestionsHow are employee stock options different from the options that trade on the exchanges and in the over-the-counter market? Throughout most of this book, we have shown that if an assets risk increases its price declines. Why is the opposite true for options? Why do firms usually finance intangible assets with equity rather than with debt? What are the responsibilities and typical payoff for a general partner in a venture capital limited partnership? What is the purpose of classifying mergers by degree of business concentration? Why do you think these classifications have changed over time?
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