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Calculate the risk-neutral probability of a down move

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Reference no: EM132855079

For a one-period binomial stock price model for a nondividend-paying stock, you are given:

(i) The period of the tree is 1 year.

(ii) S1 = 6.25 for an up move and S1 = 3.75 for a down move

(iii) The price of a 1-year 5-strike European put is 0.55.

(iv) The price of a 1-year 2.24-strike European call on the square-root of the stock is 0.12.

(a) Calculate the risk-neutral probability of a down move implied by the tree.

(b) Calculate So.

(c) If the market price of a 1-year 4-strike call is 1.3, construct an arbitrage portfolio.

Reference no: EM132855079

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