the problem is 3.10 in the attachment

We consider a stock whose price at time t = 0 is S0 and a European call option on the stock whose price at the same date is C0. The strike (exercise) price of the option is denoted by K. We suppose that the option expires in T years when two states of nature can occur: {ω1} and {ω2}. During the lifetime of the option, the underlying stock price can either move up to S0u if {ω1} occurs, or move down to S0d if {ω2} occurs. If the stock price moves up the payoff of the option is denoted Cu and if the stock price moves down the payoff from the option is Cd. We assume that there is a risk-free asset (T-bond B with maturity T ) in the market. The T -year zero-rate (annual risk-free interest rate for an investment maturing in T years) is assumed constant between t = 0 and T and independent of T; we denote it by r

Subject | Business |

Due By (Pacific Time) | 12/06/2013 12:00 am |

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