At time 0 the value of a risk-free bond is bo100 and the, Ask an Expert

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AT TIME 0 , the value of a risk-free bond is Bo=100, and the stock price is So=100. Suppose the annual risk-free interest rate is r=5%, and the one-year return on stock is Rs= 10% with probability 60% and -5% with probability 40%.

a) Find the risk-neutral probabilities {p, 1-p} for this binomial model

b) Verify that under the risk-neutral probabilities we have E[S1/B1] = So/Bo

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Accounting Basics, Accounting

Category:- Accounting Basics
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