Question: E2. Consider a three-period binomial tree for a stock price, where the spot price is $100, the probability of stock price going up in any

E2. Consider a three-period binomial tree for a stock price, where the spot price is $100, the probability of stock price going up in any time period is 0.6, and where u = 1.25 and d = 0.8. Assume zero interest rates and dividends.

(a)Find the time-zero value of an ATM European call option that expires at the end of three periods.

(b)Suppose the stock price follows the following path: 100,125,100,125. Describe the replicating portfolio and all the adjustments until the expiry.

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