Suppose the price of a security changes from period to period in such a manner that...

 

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Suppose the price of a security changes from period to period in such a manner that the price during period i is the price during period i-1 multiplied either by u = 1.1 or by d = 1/u, i > 1. Suppose the price of the security in period 0 is 50. Aside from buying and selling the security, suppose one can also pay C in period 0 and receive either 100 in period 3 if the price in period 3 is at least 52, or 0 in period 3 if the price in that period is less than 52. Assuming an interest rate of r = 0.05, determine C if no arbitrage is possible. Suppose the price of a security changes from period to period in such a manner that the price during period i is the price during period i-1 multiplied either by u = 1.1 or by d = 1/u, i > 1. Suppose the price of the security in period 0 is 50. Aside from buying and selling the security, suppose one can also pay C in period 0 and receive either 100 in period 3 if the price in period 3 is at least 52, or 0 in period 3 if the price in that period is less than 52. Assuming an interest rate of r = 0.05, determine C if no arbitrage is possible.

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