A European binary (or Digital) option pays $5 if the stock ends above $56 after 3 months and nothing otherwise. The following 3-period binomial tree represents the monthly stock price movements: Assuming cont. compounded interest rate of r = 3% and no dividends, finding the replicating portfolios for each date if the stock prices moves according to S(0) = 60 rightarrow S(1) = 63.60 rightarrow S(2) = 61.06 rightarrow S(3) = 58.61. Verify that your replicating strategy is self-financing at each step