Question: Consider a two-period binomial model with u = 2, d = 1/2, r = 1/4 and S_0 = 4. Let V be a derivative security

Consider a two-period binomial model with u = 2, d =

Consider a two-period binomial model with u = 2, d = 1/2, r = 1/4 and S_0 = 4. Let V be a derivative security that gives its holder the right to choose at time one exactly one of the following: A European call option on the stock which expires at time 2 with a strike price 6. A European put option on the stock which expires at time 2 with a strike price 4. A guaranteed to receive payment of 1/4 S_2 at time 2. We assume that the holder of the security chooses the most valuable one at time one. Determine the value V_1 of this security at time one. Determine the value V_0 of this contract at time zero. To replicate this contract, what is the number of stocks Delta_0 to hold at time zero? Delta_1 at time 1

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