Question: Consider a single-period binomial model with So = 100, r = 0.05, S((up)) = 110, S((down)) = 90, T = 1. Consider a portfolio II

Consider a single-period binomial model with So = 100, r =

Consider a single-period binomial model with So = 100, r = 0.05, S((up)) = 110, S((down)) = 90, T = 1. Consider a portfolio II = (x,y), over the time interval (0,T]. (a) Determine (and simplify) 1 if II(0) = 0. (b) Determine (and simplify) II(T) in both the up and down states. (c) Hence show that one cannot have arbitrage if y > 0. Consider a single-period binomial model with So = 100, r = 0.05, S((up)) = 110, S((down)) = 90, T = 1. Consider a portfolio II = (x,y), over the time interval (0,T]. (a) Determine (and simplify) 1 if II(0) = 0. (b) Determine (and simplify) II(T) in both the up and down states. (c) Hence show that one cannot have arbitrage if y > 0

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