Identify the three replicating portfolios

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Reference no: EM131813502

Let Δt=0.25, and create a 2-step lattice to price a 6 month European put option on a stock with S0=100, and a strike of K=100. For this Δt assume that u=1.1 and d=0.9, and that the risk free rate is r=0.01 continuous.

Identify the three replicating portfolios (one at t=0 and two at t=0.25) and confirm that you can dynamically replicate the payoff of the option at t=0.5 if the return sequence is d,d.

Reference no: EM131813502

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