Problem 2. A European binary (or Digital) option pays $6 if the stock price ends above $55 after 3 months and nothing (pays $0 ) otherwise. The following 3-period binomial tree represents the monthly stock price movements: Assuming cont. compounded interest rate of r=5% and no dividends, find the replicating portfolios for each date if the stock prices moves according to S(0)=50S(1)=60S(2)=48S(3)=38.4 Verify that the replicating strategy is self-financing at steps n=1 and n=2