Consider a three-period binary tree, assume So=4, u=2, d=1/2, r=1/4, and set the strike price of the European call option K=5. Price this European call option and give four trees: a stock price tree, a portfolio total value tree, a cash position value tree, and a delta tree. What factors affect delta changes? What does the nature of Delta as an adaptive process mean for a trading strategy?

 

K = 5 So = 4,u = 2, d = 1, r=-