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  3. = = = - = exercise 1.17. consider a financial mode

= = = - = Exercise 1.17. Consider a financial model with two times, t...

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= = = - = Exercise 1.17. Consider a financial model with two times, t O and t = 1, and a single stock S. We can buy or sell any number of shares of stock at t = 0 for the initial price of So = $50 per share. There is also a bank at which we can borrow or invest any amount of money between t = 0 and t = 1 at the (one-period) interest rate r = .1. At t=1 the price of the stock will be either $80 or $40. The probability of Si = $80 is , while the probability of S1 = $40 is . (You may take it for granted that this model is free of arbitrage.) Consider a call option V on the stock with strike price K = $60 and expiration date T = 1. Find the arbitrage-free price V of the option at t=0. = = 3' = - =

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