Problem 2. [1 point] Consider a Binomial Model with T = 2, r = 1/3, S...

 

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Problem 2. [1 point] Consider a Binomial Model with T = 2, r = 1/3, S₁ = 2, d = 5/4, u = 3/2, and p = 3/5. (a) Compute B = (B0, B₁, B₂). (b) Compute the four possible values of (S0, S1, S₂) and the probability of each outcome. (c) Draw a tree diagram representing the possible outcomes of (S0, S1, S₂) and the respective probability associated with each branch. d (d) Find the self-financing trading strategy & such that 1 = (1, -2) and 2 = (2, 2), i.e., p = (2, B) and 2 = (2, på). (e) For the strategy named in 2(d), compute all possible values of (Vo(6), V₁(0), V₂(0)) and the probability of each. Problem 2. [1 point] Consider a Binomial Model with T = 2, r = 1/3, S₁ = 2, d = 5/4, u = 3/2, and p = 3/5. (a) Compute B = (B0, B₁, B₂). (b) Compute the four possible values of (S0, S1, S₂) and the probability of each outcome. (c) Draw a tree diagram representing the possible outcomes of (S0, S1, S₂) and the respective probability associated with each branch. d (d) Find the self-financing trading strategy & such that 1 = (1, -2) and 2 = (2, 2), i.e., p = (2, B) and 2 = (2, på). (e) For the strategy named in 2(d), compute all possible values of (Vo(6), V₁(0), V₂(0)) and the probability of each.