The replicating portfolioƒ 207

If we choose p’ so thatwhere the last equality comes from the no-arbitrage argument.

ƒ

We can solve for p’ and q’ directly from the equation (*) in the form
Derivative securities: Options - Binomial asset pricing model

()

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). ~ 1 ~ & 1 ~

1

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0 0 0 1 1 0

p

q

d

u

d

r

p

r

d p d u S r

dS

q

uS

p

r

T S q H S p S

−

=

−

−

• 
  

=

⇒

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1
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(*)
1
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0
1
1
0
1
1
0
V
r
T V q H V p X
r
T S q H S p S

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