Question: 2. Consider a three-period binomial model in Figure 2 with S0=4,u=2, and d=1/2. The risk-free rate is 10% at each period. The payoff of the

2. Consider a three-period binomial model in Figure 2 with S0=4,u=2, and d=1/2. The risk-free rate is 10% at each period. The payoff

2. Consider a three-period binomial model in Figure 2 with S0=4,u=2, and d=1/2. The risk-free rate is 10% at each period. The payoff of the focus asset is S32. (c) What is the risk-neutral distribution of S3(S1=S1(H)), i.e., the condition distribution of S3 given S1=S1(H) under the risk-neutral measure? (d) Based on the conditional distribution that you obtained in 2(c), compute E~[V3(S1=S1(H))]. What can you find by comparing your result with that in 2(a) ? 2. Consider a three-period binomial model in Figure 2 with S0=4,u=2, and d=1/2. The risk-free rate is 10% at each period. The payoff of the focus asset is S32. (c) What is the risk-neutral distribution of S3(S1=S1(H)), i.e., the condition distribution of S3 given S1=S1(H) under the risk-neutral measure? (d) Based on the conditional distribution that you obtained in 2(c), compute E~[V3(S1=S1(H))]. What can you find by comparing your result with that in 2(a)

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