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Question

Consider a Binomial Model with T = 2, r = 1.5, S_0 = 90, d = 1/3, u = 4, and p = 0.3. Compute B_0, B_1, and B_2. By drawing a tree diagram, compute all possible values of (S_0, S_1, S_2), and compute the probability of each outcome represented by each branch. Give an example of a self-financing trading strategy phi such that (alpha_2, beta_2) is not constant. Compute all possible values of V_0(phi), V_1(phi) and V_2(phi).