3. Suppose that the price of stock A follows a two-timestep Binomial Lattice model with the...
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3. Suppose that the price of stock A follows a two-timestep Binomial Lattice model with the following parameters: Current stock price: S = 120. Up-factor: u = 1.5. Down-factor: d = 0.5. For computational simplicity, R = 1. If a European call option with strike price $80 maturing two months from now is priced at $50. Show explicitly how you can make an arbitrage profit. Answer. 3. Suppose that the price of stock A follows a two-timestep Binomial Lattice model with the following parameters: Current stock price: S = 120. Up-factor: u = 1.5. Down-factor: d = 0.5. For computational simplicity, R = 1. If a European call option with strike price $80 maturing two months from now is priced at $50. Show explicitly how you can make an arbitrage profit. Answer.
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