Purchase a derivative security that makes payments

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Consider a one-period binomial model that includes a stock, S, a bank, and has two trading times {0, 1}. The bank will accept deposits or make loans at a one-period interest rate of r = .20. An amount B0 (positive for deposits, negative for loans) at time t = 0 will grow to B1 = (1 + r)B0 = 6 5B0 at time t = 1. At time t = 0, any number of shares of stock can be bought or sold at the price S0 = $35. At time one, the stock price will be one of two values, S1(H) = $60 or S1(T) = $30 There is a 2/3 probability that the value of the stock at t = 1 will be $60, and a 1/3 probability that it will be $30. (You may take it for granted that this model is free of arbitrage.) A client comes to you with $100,000 to invest. She thinks the stock will increase in value, but is unwilling to incur any loss of capital. You you advise her to use all of her capital to purchase a derivative security that makes payments

Reference no: EM132467150

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