PPT Slide

p0 exists, is unique, and satisfies 0 < p0 < 1 if and only if

Long-term zero-coupon bond should not be denominated by the

short-term zero-coupon bond.

Remark

If P0(1, 2)u < P0(1, 2)d < r(0)P0(0, 2), then we can arbitrage by

shorting the bond, investing the proceed of P0(0, 2) in bank to earn

r(0)P0(0, 2).