Question: 1. Consider the 1-dim Black-Scholes model with (constant) interest rate r and (constant) volatility o. (a) Compute the arbitrage-free price process II, for the option

1. Consider the 1-dim Black-Scholes model with (constant) interest rate r and (constant) volatility o. (a) Compute the arbitrage-free price process II, for the option A = (Sr)", where a > 0 (constant). Verify your answer for a = 1. (b) Show that II, is of the form F(t, S,) for a function F and compute the replicating strategy for .\\'. (15 + 15 = 30 points)

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