Learning objectives: Calculate the expected discounted value of a zero-coupon security using a binomial tree. Construct and apply an arbitrage argument to price a call option on a zero-coupon security using replicating portfolios. Define risk-neutral pricing and apply it to option pricing...
What if we have a very low volatility? In the printscreens a changed up and down factors from (1,1;0,9) to (1,01;0,99) respectively. I got funny risk-neutral probabilities (see the printscreens). With such nubers our trees dont seem to work properly? How do you think?
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