Question: We saw in Section 10.1 that the undiscounted risk-neutral expected stock price equals the forward price. We will verify this using the binomial tree in

We saw in Section 10.1 that the undiscounted risk-neutral expected stock price equals the forward price. We will verify this using the binomial tree in Figure 11.4.

a. Using S = $100, r = 0.08, and Î´ = 0, what are the 4-month, 8-month, and 1-year forward prices?
b. Verify your answers in (a) by computing the risk-neutral expected stock price in the first, second, and third binomial period. Use equation (11.12) to determine the probability of reaching each node.

$74.678 534.678 $61.149 $22.202 0.269 $50.071 $12.889 0.323 $52.814 $12.814 :N/A $41.000 $7.074 : 0.357 $43.246 $5.700 Y 0.495 $35.411 $2.535 0.495 $37.351 $0.000 N/A $30.585 $0.000 $26.416 $0.000

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a We can calculate the forward prices as F 04 months 100 e 00813 10270... View full answer

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