2.[8 points] Consider a CRR model with parameters d,r, u and S(O). Assume the 2-period case in exercise (a) and the l-period case in (b). (a) (3pts) By computing the expectation directly show that EP [S(2)] = S(0)(1+r)2. It might be helpful to keep in mind the binomial equation (a + b)2 = a + 2ab + b2. (b) (5pts) Now, assume that the stock pays stock dividends, i.e. one share at time 0 means v > 1 shares at time 1. Show how no arbitrage implies uv > 1+r > dv. 2.[8 points] Consider a CRR model with parameters d,r, u and S(O). Assume the 2-period case in exercise (a) and the l-period case in (b). (a) (3pts) By computing the expectation directly show that EP [S(2)] = S(0)(1+r)2. It might be helpful to keep in mind the binomial equation (a + b)2 = a + 2ab + b2. (b) (5pts) Now, assume that the stock pays stock dividends, i.e. one share at time 0 means v > 1 shares at time 1. Show how no arbitrage implies uv > 1+r > dv