Question: Consider a single-period CRR model with interest rate 0.05, S(0) = 10, u = 1.2 and d = 0.98. Suppose you have written an option

Consider a single-period CRR model with interest rate 0.05, S(0) = 10, u = 1.2 and d = 0.98. Suppose you have written an option that pays the value of the square root of the absolute value of the difference between the stock price at maturity and $10.00; that is, it pays √S(1) - 10|. How many shares of the stock should you buy to replicate this payoff? What is the cost of the replicating portfolio?

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