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

question 9

Multiple Choice

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

• A) "up factor \(\gt\) down factor \(\gt\) dollar return" [U \(\gt\) D \(\gt\) (1 + R)] for all zero-coupon bonds
• B) U \(\gt\) (1 + R) \(\gt\) D for all zero-coupon bonds
• C) the pseudo-probabilities must be equal for all zero-coupon bond/money market account pairs
• D) the pseudo-probabilities must be equal to 1/2
• E) None of these answers are correct.

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