Question: Consider a binomial model with parameters T = 3, S0 = 100, r = 0.1, u = 0.7, d = 0.1, p = 0.7. Consider

Consider a binomial model with parameters T = 3, S0 = 100, r = 0.1, u = 0.7, d = 0.1, p = 0.7. Consider

a European contingent claim with CT = 1000 if the stock price decreases at t = 1, t = 2 and increases at

t = 3, and CT = 0 zero otherwise.

Suppose the stock price becomes S1 = 90 at time t = 1. Answer the following two questions for the

European contingent claim in this scenario.

(a) (6 points) Compute the price V1.

(b) (6 points) Compute the composition of the portfolio (2, 2).

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