Suppose that 0 < 1 + r ≤ d < u. Create a portfolio X0, ∆0 such that: X0 ≤ 0 and X1 ≥ 0 Not all of X0, X1(H), and X1(T ) are equal to zero. S0=4, u=2,d=0.5
Question
Solution 1
To create a portfolio X0, ∆0 such that X0 ≤ 0 and X1 ≥ 0, we need to find the values of X0 and ∆0.
Given that S0=4, u=2, d=0.5, we can use these values to find the values of X0 and ∆0.
Step 1: Calculate the up and down prices of the stock.
Su = S0 * u = 4 * 2 = 8 Sd = S0 * d = 4 * 0.5 = 2
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