Consider a two period binomial model where in each round, Ask an Expert

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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 $20

a) Calculate the 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?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91624782

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