Question: Problem 3. Consider a binomial model with =0.2,=0.05 and interest rate r=6% annual, both compounded continuously. Using T=1 maturity of one year, initial stock price

Problem 3. Consider a binomial model with =0.2,=0.05 and interest rate r=6% annual, both compounded continuously. Using T=1 maturity of one year, initial stock price S(0)=100 and N=3 periods (h=T/N=1/3), consider the American Call CAm with strike K=100. (1) Find the premium of this American Call today t=0. (2) At which statesodes is early exercise rational? (3) Suppose the stock moves are Up/Up/ Down. Compute the replicating portfolio and the exercise strategy along that scenario (It is possible to stop before T )

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