Question: Consider a multiplicative binomial model with N = 3, r = 0, u = 1.2, d = 0.8 and S 0 = 100. At time

Consider a multiplicative binomial model with N = 3, r = 0, u = 1.2, d = 0.8 and S 0 = 100. At time t = 1 when S 1 = 120 a (european) call option with maturity at T = 3 and struck at 100 is quoted at 25. Is that a fair value? If yes explain why? If not explain why and explicitly dene an arbitrage strategy (you have to give details of the arbitrage strategy)

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