The riskless portfolio consists of a short position in the option and a long position in shares. Because changes during the life of the option, this riskless portfolio must also change.
Social Science & Law
Mahasiswa
Consider the situation in which stock price movements during the life of a European option are governed by a two-step binomial tree. Explain why it is not possible to set up a position in the stock and the option that remains riskless for the whole of the life of the option.
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