Question: Consider a1 -period binomial model with R =1.02 , S 0 =100 , u =1/ d =1.05 . Compute the value of a European call

Consider a1

-period binomial model withR=1.02

,S

0

=100

,

u=1/d=1.05

. Compute the value of a European call option on the stock

with strikeK=102

. The stock does not pay dividends.

When you construct the replicating portfolio for the option in the previous question how many dollars do you need to invest in the cash account?

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