Question: Consider a one step binomial tree for the portfolio II = AS-NB which is long A shares and short N bonds and the interest

Consider a one step binomial tree for the portfolio II = AS-NB

Consider a one step binomial tree for the portfolio II = AS-NB which is long A shares and short N bonds and the interest rate r is constant. Assume that the portfolio must replicate the value of an option Vo at time t= 0, such that at time T. V is the value of the option if the share price moves up, and V is the value if share price moves down. Derive the two equations for the value of the portfolio that replicates the value of the option when the share price moves up or down. Solve these equations to find the value of A and N, and use the fact that two investments with the same payoff must have the same value to derive a formula for Vo

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