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  3. consider the nstep binomial asset pricing model with 0...

Question: consider the nstep binomial asset pricing model with 0...

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Consider the N-step binomial asset pricing model with 0 <d<1 +r<u. AEuropean bear-spread option has payoff where Ki< K2. (a) Assume N 3, So 100, Ki -85, K2100, 0.05,.10, and d 0.90 Calculate the price at time zero, Vo, of the bear-spread option. (b) Specify how you can replicate the payoff of the European bear-spread option by investing in the stock and the bank account and verify that a short position in the European bear- spread option is hedged if the outcome of the coin toss sequence is wwws-TTT.

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