Consider a one-step binomial model for two no-arbitrage assets X and Y with parameters 0 Compute the

Consider a one-step binomial model for two no-arbitrage
assets X and Y with parameters 0

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Compute the price of the contract V using both martingale
measures P Y and P X.

Consider a two-step binomial model with general u > 1
> d > 0.

(a) Find the price and the hedging portfolio for a
contract V that pays of

 

Note that the price and the hedge do not depend on the
choice of parameters u and d.

(b) How can one lock an arbitrage opportunity if somebody
is offering to buy or to sell V0 for 1.05 × X0?

(c) Determine the price and the hedge of a contract A
that pays of

 

using the parameters