Question: You construct a one-period binomial tree to model the price movements of a stock. You are given: The length of one period is 6 months.

You construct a one-period binomial tree to model the price movements of a stock. You are given: The length of one period is 6 months. The current price of the stock is 100. The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 3%. Suppose: u denotes one plus the rate of gain on the stock if the stock price goes up. d denotes one plus the rate of loss on the stock if the stock price goes down. r denotes the continuously compounded risk-free interest rate. Which of the following parameters would give rise to an arbitrage opportunity?

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