Please just do parts b. and c. The Jarrow-Rudd model (aka, the lognormal binomia
ID: 2789550 • Letter: P
Question
Please just do parts b. and c.
The Jarrow-Rudd model (aka, the lognormal binomial tree) is a binomial tree in which the up and down factors are defined as follows where e r stands for the continuously-compounded, risk-free interest rate, · is the stock's dividend yield, denotes the volatility parameter, and e h stands for the length of a single period in a tree. Answer the following questions: a. (2 points) What is the ratio Su/Sd? b. (2 points) What is the (as simplified as possible) expression for the risk-neutral probability of the stock price going up in a single step? c. (5 points) As was the case with the forward tree, the no-arbitrage condition for the binomial asset- pricing model is satisfied for the Jarrow-Rudd tree regardless of the specific values of ' ,r and h. True or false?Explanation / Answer
Expression for risk neutral probability = (e^(r*t)-d)/(u-d)
And yes, the no arbitrage condition for the binomial asset pricing model is satisfied for the Jarrow Rudd tree regardless of the specific values of volatility, dividend yield, risk free rate, length of single period in a tree