Home / Questions / A European binary or Digital option pays $10 if the stock ends above $57 after 3 months an...

A European binary or Digital option pays $10 if the stock ends above $57 after 3 months and nothing otherwise The following 3 period binomial tree represents the monthly stock price movements

A European binary (or Digital) option pays $10 if the stock ends above $57 after 3 months and nothing otherwise. The following 3-period binomial tree represents the monthly stock price movements: Assuming cont. compounded interest rate of r = 3% and no dividends, find the replicating portfolios for each date if the stock prices moves according to S(0) = 60 rightarrow S(1) = 63.60 rightarrow S(2) = 61.06 rightarrow S(3) = 58.61 Verify that your replicating strategy is self-financing at each step. Note that you do not need to calculate the hedge positions for the entire tree (only along the path) but you need till the prices.

 

Apr 08 2020 Read more Less More

Answer (Solved)

question Get solution

Recent Questions

Chat Now

Welcome to Live Chat

Welcome to MyCourseHelp Services, World's leading Academic solutions provider with Millions of Happy Students.

Please fill in the form