Question: a) Consider a one-period binomial model in which the underlying is at 30 and can go up 14 percent or down 11 percent each period.

a) Consider a one-period binomial model in which the underlying is at 30 and can go up 14 percent or down 11 percent each period. The risk-free rate is 3 percent per period.

Show how to execute an arbitrage transaction that will earn more than the risk-free rate when you have the call being priced at $3 and $2 respectively. Use 1000 calls

(b) Discuss the different scenarios that will happen to B-S-M formula when the volatility is zero?

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