Derivative security (European binary/digital option paying 100 when the stock price is between 50 and 100 and
Fantastic news! We've Found the answer you've been seeking!
Question:
Derivative security (European binary/digital option paying 100 when the stock price is between 50 and 100 and paying zero otherwise). Each step is 12 months
The actual probabilities are 1/3 for up and 2/3 for down at each node.
a. (3 points) What are the risk-neutral probabilities of up and down?
b. (3 points) What is the value of the binary option at each node?
c. (3 points) In the portfolio strategy that replicates the binary option, what are the holdings in the stock and the bond at each node?
Related Book For
Physics
ISBN: 978-0077339685
2nd edition
Authors: Alan Giambattista, Betty Richardson, Robert Richardson
Posted Date: