Question: Binomial Tree - Extra Credit A. Demonstrate algebraically why the replicating portfolio method produces the same option prices as the risk-neutral probability method. That is,

Binomial Tree - Extra Credit A. Demonstrate algebraically why the replicating

Binomial Tree - Extra Credit A. Demonstrate algebraically why the replicating portfolio method produces the same option prices as the risk-neutral probability method. That is, you get the same value for the price of an option using either of these formulas: 1. C= AS+B 2. C= e-rh[Cu x p* + Ca x (1-p*)] B. Demonstrate that if u and d are given by: u = erh+ovn d=erh-ovh that p*

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