Consider a two step binomial model (St)t=0,1,2 with So = 1, S1 = 2 or Si = 1 and S2 = 4, S2 = 2, or S2 = 1. Suppose that the risk free asset Bt = $1 for all t and risk free rate r = 0. Consider the option whose payoff C at time t = 2 is given by 0 if S2 = 4 C= $1 if S2 = 2 0 if S2 = 1 (a) Build a hedging portfolio for the claim C at time t = 1 depending on Si. (b) Price the claim C at time t = 1 depending on Sy at time t = 1 depending on S1 (C) Build a hedging portfolio for the claim C at time t = 0. (d) Price the C at time t = 0. (e) Does the market admit an equivalent risk-neutral measure? (f) Is this model without arbitrage? If this market has arbitrage, provide an explicit provide an example. Consider a two step binomial model (St)t=0,1,2 with So = 1, S1 = 2 or Si = 1 and S2 = 4, S2 = 2, or S2 = 1. Suppose that the risk free asset Bt = $1 for all t and risk free rate r = 0. Consider the option whose payoff C at time t = 2 is given by 0 if S2 = 4 C= $1 if S2 = 2 0 if S2 = 1 (a) Build a hedging portfolio for the claim C at time t = 1 depending on Si. (b) Price the claim C at time t = 1 depending on Sy at time t = 1 depending on S1 (C) Build a hedging portfolio for the claim C at time t = 0. (d) Price the C at time t = 0. (e) Does the market admit an equivalent risk-neutral measure? (f) Is this model without arbitrage? If this market has arbitrage, provide an explicit provide an example