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Binomial models is arbitrage-free except

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1.3 Each of the following 1-period binomial models is arbitrage-free except:

(A) S0 = $75, Su = $90, Sd = $65, (r-δ)*T = 15%(B) r = 6%, δ = 0%, u = 1.3, d = 0.85, T = 5(C) c0 = $8, cu = $12, cd = $0, r = 7%, δ = 4%, T = 2(D) p0 = $4, pu = $1, pd = $16, r = 2%, δ = 7%, T = 4 (E) Each of the four models is arbitrage-free

2. An actuary is using a 1-period binomial model to evaluate European options on a non-dividend-paying stock expiring in 9 months. If the model assumes S0 = $80, Su = $85, Sd = $70, r is between 3% and 9%, and no arbitrage opportunities exist, then what is the range of possible values of a call option with strike $75 expiring in 9 months?

(A) Between $6.67 and $9.41 (B) Between $6.67 and $9.71 (C) Between $7.70 and $9.41 (D) Between $7.70 and $9.71 (E) None of the above

Reference no: EM131442383

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