Consider a three-period financial market with t = 0,1,2,3 and a down-and-out call barrier option with...

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Consider a three-period financial market with t = 0,1,2,3 and a down-and-out call barrier option with barrier H = 90 and strike K = 110. (a) Draw a binomial tree for the possible values of (St)-0,1,2,3 and the state the payoff as a function of the path. (b) Price the barrier option by finding (C) for each t = 0, 1, 2, 3. (c) St Hedge the barrier option by finding the hedging strategy = (g(0), g(¹)) for t = 1,2,3. Draw the final diagram showing prices and hedging strategies at each node. Consider a three-period financial market with t = 0,1,2,3 and a down-and-out call barrier option with barrier H = 90 and strike K = 110. (a) Draw a binomial tree for the possible values of (St)-0,1,2,3 and the state the payoff as a function of the path. (b) Price the barrier option by finding (C) for each t = 0, 1, 2, 3. (c) St Hedge the barrier option by finding the hedging strategy = (g(0), g(¹)) for t = 1,2,3. Draw the final diagram showing prices and hedging strategies at each node.

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