Question: Let 5'0, 31, . . . , SN be a price process in the Nperiod binomial model, and let VN be the payoff for a

Let 5'0, 31, . . . , SN be a price

Let 5'0, 31, . . . , SN be a price process in the Nperiod binomial model, and let VN be the payoff for a European derivative security that pays off on day N , with the property that VN(w) Z 0 for all to E Q. n:N 7120 (a) State the intrinsic value process (Cu) to model this European security as an Amer ican security. (b) Use mathematical induction to show that the American security with price process (l)"=6V arising from this intrinsic value satises Vn : V" for n : 0, . . . , N. n: (c) Suppose that N 2 2, that d = u'l, and suppose that K > SD. Show that a K strike European put that pays of at time N is pathdependent when considered as an American security

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