Consider the following one-period binomial model for stock price. At t = 0 the stock price is
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Consider the following one-period binomial model for stock price. At t = 0 the stock price is $80 and at t = 1 (t is in years) it could be $70 with probability p > 0 and $y with probability 1 ? p. The interest rate is assumed to be 8%.
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(1) Determine the range of values for y that precludes arbitrage in this model.
(2) Assume that y = $83. Construct an arbitrage strategy for this model.
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Related Book For
Understanding Basic Statistics
ISBN: 9781111827021
6th Edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase
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