Question: Consider a binomial model with parameters T = 2, S0 = 100, r = 0, u = 0.2, d = 0.1, p = 0.9, and

Consider a binomial model with parameters T = 2, S0 = 100, r = 0, u = 0.2, d = 0.1, p = 0.9, and a call option with strike price K = 90 and maturity T = 2. (a) Find the replicating portfolio of the call option. That is, find explicitly (1, 1) and (2, 2). (We have computed (2(), 2()) in class.) (b) Compute the initial value of the replicating portfolio by using (1, 1). (c) Compute the price of the call option by computing the expectation with respect to the risk-neutral probability measure P . (Your answer should be the same as in part (b) above.)

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