(30 points) Consider a two-period binomial tree with the following parameters: So = 100, u = 1.1, d = 1/1.1. r = 0.05 (w

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30 Points Consider A Two Period Binomial Tree With The Following Parameters So 100 U 1 1 D 1 1 1 R 0 05 W 1 (24.63 KiB) Viewed 48 times

(30 points) Consider a two-period binomial tree with the following parameters: So = 100, u = 1.1, d = 1/1.1. r = 0.05 (we use discrete compounding). The terminal payoff of the security is fuu = 0, fud = 1, fdd = 0. So this is a butterfly option. Construct a self-financing portfolio consisting of the stock and the cash account that replicates the butterfly at maturity, i.e., specify the components of the portfolio (consisting of bank account and the underlying asset) on each node: time zero, branch u, and branch d.