Probability Assignment

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Probability Assignment

%Example 4.8. Consider a two-period binomial tree for a risky asset S with u = 1.2 and d 2 0.8. Assume the efieotiue interest rate i = 4%. Consider sample space 9 = {w1,w2,w3,w4} andinformation model 7’ :2 {7319, k 2 01 112} as defined in Emample4.7 with 011 = uu, mg 2 ud, Log 2 du, and 0.34 = dd. Calculate EQ[S(1)I731] and EQ[S(2)I’P1] where IEQ denotes the expectation under the risk-neutral probability measure.

%Example 4.8. Consider a two-period binomial tree for a risky asset S with u = 1.2 and d 2 0.8. Assume the efieotiue interest rate i = 4%.
Consider sample space 9 = {w1,w2,w3,w4} andinformation model 7’ :2 {7319, k 2 01 112} as defined in Emample4.7 with 011 = uu, mg 2 ud, Log 2 du, and 0.34 = dd. Calculate EQ[S(1)I731] and EQ[S(2)I’P1] where IEQ denotes the expectation under the risk-neutral probability measure.