(Solution Download) A stock price is currently $30. During each two month period for the next four months it is expected


A stock price is currently $30. During each two month period for the next four months it is expected to increase by 8% or decrease by 10%. The risk free interest rate is 5%. Use a two step tree to calculate the value of a derivative that pays off max[(30 - ST), 0]^2 where ST is the stock price in four months. Use no arbitrage arguments (you need to show how to set up the riskless portfolios at the different nodes of the binomial tree).

 







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