Consider 1-period in a binomial model • Option replication and hedging
• Computing option fair value
• Risk neutral valuation
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Pricing by Replication in a Binomial Model
Consider a binomial model with an up probability p > 0
Su = uSt t+1
u: up ratio
Sd = dSt t+1
d: down ratio
CS476/676 3
• the length of time interval ∆t > 0, • 0