3. Consider a two-period binomial model in Figure 1. The upward return and downward return are given by u and d, respectively. The payoff of a focus asset is V2 at time 2 . Use the discussion of portfolio replication to answer the following two questions. b) Suppose the risk-free interest rate is fixed over time, which is assumed to be a constant r. The payoff of the focus asset satisfies V2(HT)=V2(TH), and this is the case of an Asian option. For an Asian call option with strike K, the payoff V2 is max((S1+S2)/2K,0). In this case, what are the fair prices V0,V1(H),V1(T), and the corresponding hedging strategies 0,1(H), and 1(T) ? Compared with the solution we talked about in class, what did you find? Does the backward induction pricing approach still hold