Question: Exercise 23.2.7 (1) Suppose we are given a binomial state price tree and wish to price a security with the payoff function c at time

Exercise 23.2.7 (1) Suppose we are given a binomial state price tree and wish to price a security with the payoff function c at time j by using the risk-neutral pricing formula d( j ) E[ c ]. What is the probability of each state’s occurring at time j?

(2) Take the binomial state price tree in Fig. 23.7(b). What are the probabilities of the C nodes in this risk-neutral economy?

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