Question: Consider the binomial model with S0 D 64, u D 2, d D 1=2, and r D 1=4. (a) Find the value Vn.a/ of the

Consider the binomial model with S0 D 64, u D 2, d D 1=2, and r D 1=4.

(a) Find the value Vn.a/ of the call option .S3  125/C and the hedging strategy

n.a/.

(b) Check your answer to

(a) by computing V0 D E.V3=.1 C r/3/.

(c) Find the value at time 0 of the put option.

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