Question: You have a stock in the one-period binomial model such that So = 4S, (H) = 8,S, (T) = 2, and r = 1.5. 1.2.

You have a stock in the one-period binomial model such that

You have a stock in the one-period binomial model such that So = 4S, (H) = 8,S, (T) = 2, and r = 1.5. 1.2. (a) Show that this setup violates the no-arbitrage assumption (b) Show how to extract arbitrage by explicitly defining a portfolio (X, ) such that Xo 0

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