Consider a binomial model with S0 = 100, u = 1.2, d = .9 and r = .05. Use a three-period (two-step) binomial tree and replicating portfolios or perfect hedging to price a derivative that pays $15 if the final stock price is 144, $5 if the final stock price is 108, and $2 if the final stock price is 81. Here is the stock price tree:

Question 14. Consider binomial model with So = 100, u = 1.2, d =.9 and r = .05. Use a three period (two step) binomial tree and replicating portfolios or perfect hedging to price a long straddle (holding both a long call option and a long put option on the same stock with the same strike price) with K = 110. This pays at maturity the absolute value of the difference between the stock price at maturity and the strike price, Payoff = \\ST - K| Here is the stock price tree: 144 120 So = 100 108 90 81