A Necessary and Sufficient Condition to Rule Out Arbitrage Profits $\gt$

question 2

Multiple Choice

A necessary and sufficient condition to rule out arbitrage profits in the multiperiod binomial tree is that the following must hold:

• A) "up factor \(\gt\)down factor \(\gt\)dollar return"
• B) "up factor \(\gt\)dollar return \(\gt\)down factor"
• C) the pseudo-probability for an up movement must equal that for the down movement
• D) the pseudo-probabilities for an up movement at any node of the tree must be the same for all bond/money market account pairs
• E) None of these answers are correct.

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A discount allowed for a payment within the discount period.

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The total amount of money owed that has not yet been paid off.