Question: 2. (40) Consider a special type of lookback option Whose payoff at maturity is given by the difference between the maximum and minimum stock prices

2. (40) Consider a special type of lookback option Whose payoff at maturity is given by the difference between the maximum and minimum

stock prices attained over the life of the option. LT = max

St min St te[o,T] te[0,T] Consider pricing this option using the binomial

2. (40) Consider a special type of lookback option Whose payoff at maturity is given by the difference between the maximum and minimum stock prices attained over the life of the option. LT = max St min St te[o,T] te[0,T] Consider pricing this option using the binomial model. Let the current price of stock in Hindsight Inc. be So = 216 and consider an option maturing in n = T = 3 periods, so that At = 1 per period. Suppose for the sake of simplicity that the risk free rate is 7' = 0, and that each period the stock price either doubles u = 2, or falls by half d = i = % (d) (15) Using backward induction, calculate the initial price of this option

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