Solution-Use the arbitrage theorem-risk-neutral probability

Use the arbitrage theorem-risk-neutral probability

Assignment Help Physics

Reference no: EM131221119

Consider a one-period model for the price of a stock s: suppose Its time-0 value S₀ is known, and it is known that at T, its value is either S_u or S_d. Assume further that V is a derivative on S expiring at time T; suppose it’s time-0 value is l4. and that at time T, it has value U if the stock price is S_u or D if the stock price is S_d. Use the arbitrage theorem to prove that the risk-neutral probability is given by

And

Verified Expert

Considering arbitrage opportunity, we can construct following equation under hypothetical risk-neutral world. Expected Return on stock = probability of rise

Reference no: EM131221119

Questions Cloud

Find data concerning the annual consumption : Find data concerning the annual consumption and price volatility of 5 basic products of the Greek (or other market), compute their price elasticity and income elasticity

Sum of dices when three dices are rolled together : Sum of dices when three dices are rolled together. What is the probability of getting a sum of 4 if three dices are rolled together? What is the probability of getting a sum of 5 and 7 if you throw three dices together? What is the probability of get..

Squaring numbers ending with five : Calculating cube of numbers, Squaring numbers ending with five

Calculating cube of numbers : Calculating cube of numbers. To do the cube of a two digit number, What is the cube of 13. What is the cube of 14? Find the cube of 16.

Use the arbitrage theorem-risk-neutral probability : Consider a one-period model for the price of a stock s: suppose Its time-0 value S0 is known, and it is known that at t i11w 7’, its value is either Su or Sd. Assume further that V is a derivative on S expiring at time T; suppose it’s time-0 value is..

What is the average beta of all stocks : The market portfolio has a standard deviation of 20 percent, and the covariance between the returns on the market and those on a stock Z is 0.08. What is the standard deviation of a fully diversified portfolio of such stocks? What is the average beta..

Gamma function : GAMMA FUNCTION

Determine the proper amount of net income : During the course of your examination of the financial statements of the Hales Corporation for the year ended December 31, 2016, you discover the following: Hales borrowed $22,000 from a local bank on October 1, 2016. Principal and interest at 12% wi..

Ob-order costing-the unadjusted cost of goods sold : Vanproosdy Inc., which uses job-order costing, has provided the following data for February: Direct materials. $78,000 Direct labor cost $94,000 Manufacturing overhead cost incurred $54,000 Manufacturing overhead cost applied. $50,000 Inventories: Th..

User Account

All Pages

Use the arbitrage theorem-risk-neutral probability

Reference no: EM131221119

Reference no: EM131221119

Questions Cloud

Reviews

Write a Review

Physics Questions & Answers

Find the magnitude of the resulting magnetic field

Find the equivalent resistance

What is the electric field at the location

What is the maximum displacement of the bridge deck

What is the magnitude of the current in the wire

Blackbody

Gravity conveyor

Calculate the dc voltage

Quadrupole moments in the shell model

Determine the tension in each string

Introductory mechanics: dynamics

Evaluate maximum altitude

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT