Question: Consider the one-period binomial example studied in Class 17 to find the price of the up and down securities. At time t = 0 the

Consider the one-period binomial example studied in Class 17 to find the price of the up and down securities. At time t = 0 the stock price is equal to S0. At time 1 is eithergoesupordown. Ifitgoesup,itspriceisS1+ =uS0,andifitgoesdownits price is S = d S0, where d < u. Let r denote the interest rate. (a) Useanoarbitrageargumenttoshowthatu>1+r>d. (b) Use the replicating portfolio approach to find the price of the down security shown in the slides.

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