Consider a Binomial Model with T = 3, r =

Question : Consider a Binomial Model with T = 3, r = : 7099

Consider a Binomial Model with T = 3, r = 0.2, S_0 = 40, d = 1/2, u = 2, and p = 0.6. Compute B_0, B_1, and B_2. By drawing a tree diagram, compute all possible values of (S_0, S_1, S_2, S_3), and compute the probability of each outcome represented by each branch. Consider the primary financial market in problem 3, and let X be a European contingent claim with payoff X = max(S_2, S_3) and expiration time T = 3. Find the value of X for all possible outcomes. Find a replicating strategy phi^* for X. Compute the manufacturing cost of phi^*.


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