Question: Task 3 [10]. Consider a single-period CRR model with interest rate r = 0.05, S(0) = 10, u = 1.2, and d 0.98. Suppose you
Task 3 [10]. Consider a single-period CRR model with interest rate r = 0.05, S(0) = 10, u = 1.2, and d 0.98. Suppose you have written an option that pays the value of the square root of the absolute value of the difference between the stock price at maturity and $10.00; that is, it pays 15(1) - 10. How many shares of the stock should you buy to replicate this payoff? What is the cost of the replicating portfolio? Task 3 [10]. Consider a single-period CRR model with interest rate r = 0.05, S(0) = 10, u = 1.2, and d 0.98. Suppose you have written an option that pays the value of the square root of the absolute value of the difference between the stock price at maturity and $10.00; that is, it pays 15(1) - 10. How many shares of the stock should you buy to replicate this payoff? What is the cost of the replicating portfolio
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