I have a question I am not sure how to approach:
Suppose interest rates is 50%, a stock worth $1 today can be worth $2, $1, $0.5 next year. If the option that pays $1 only when S = $2 is traded in the market and is worth $0.125, calculate the price and replicating portfolio of the option that pays $0.5 when S = $1. It has something to do with pay-off matrix but I don't know how to apply it?
Suppose interest rates is 50%, a stock worth $1 today can be worth $2, $1, $0.5 next year. If the option that pays $1 only when S = $2 is traded in the market and is worth $0.125, calculate the price and replicating portfolio of the option that pays $0.5 when S = $1. It has something to do with pay-off matrix but I don't know how to apply it?
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