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Trinomial model. Assume the the spot price of a stock is So and at T =1 the stock can take either of the three values
Trinomial model. Assume the the spot price of a stock is So and at T =1 the stock can take either of the three values Su > Sm > Sd. Suppose that 1$ invested at t = 0 yields e" at T = 1. (a) Consider a contingent claim which pays at T=1, Hu, Hm, Hd if the stock takes the values Su, Sm, Sd respectively. Can such claim be replicated in general? Otherwise find a relation which ensures the replication of the claim. Trinomial model. Assume the the spot price of a stock is So and at T =1 the stock can take either of the three values Su > Sm > Sd. Suppose that 1$ invested at t = 0 yields e" at T = 1. (a) Consider a contingent claim which pays at T=1, Hu, Hm, Hd if the stock takes the values Su, Sm, Sd respectively. Can such claim be replicated in general? Otherwise find a relation which ensures the replication of the claim
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