Setup violates the no-arbitrage assumption

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Reference no: EM131948716

1. Five years after Anne deposited $3600 in a savings account that earned interest at 4.8% compounded monthly, the rate of interest was changed to 6% compounded semi-annually. How much was in the account 12 years after the deposit was made?

2. You have a stock in the one-period binomial model such that S0= 4, S1(H) = 8, S1(T) = 2,and r= 1.5.

(a) Show that this setup violates the no-arbitrage assumption.

(b) Show how to extract arbitrage by explicitly defining a portfolio(X,?) such that X0<0 while X1≥0.

Reference no: EM131948716

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