Consider again the one-period binomial model of Question 9, where the current spot rate is So = 75 pence, the spot rate at the end of the period is either Su 100 = pence or Sa = 60 pence, the forward rate is F = 80 pence and the interest rates are rs = 1/3 and rd = 1/4.
(a) Use the forward price to determine the risk-neutral probabilities Pu and Pd, where Pu is the risk-neutral probability in the "up state" and Pad is the risk- neutral probability in the "down state".