Binomial model-what is the fair market value for this option

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Reference no: EM13971910

Consider a two period binomial model where in each round the stock increases or decreases by 10%. The current stock price is $20 and the risk free rate is 3.33% each period. We first consider a European call option with a strike of $20. a) Calculate value of the option based on replication. Specify what will be the replicating portfolio in each round. b) Calculate the value of the option based on risk neutral probabilities. c) In this part we are interested in an option on option. Specifically consider a European call option on the original option that lets you buy it to buy the option at a price of $1 at t=1. What is the fair market value for this option?

Reference no: EM13971910

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