Microsoft PowerPoint - PoF.ppt

The replicating portfolioƒ 205

Let us now consider an alternative way to solve the wealth equations (i) and (ii).

ƒ

We rewrite the wealth equation as follows:
Derivative securities: Options - Binomial asset pricing model

()()(

)

()

()

()

i.p.

,

1

1

1

1

1

1

0

1

0

0

1

0

1

0

0

0

0

0

1

0

1

0

1

⎞ ⎟ ⎠

⎛ ⎜ ⎝

− + ∆ + = + ⇒

+ − ∆ + + =

= ∆ − + + ∆ =

=

∆

=

S r S X r V

S

r

S

X

r

S

X

r

S

B

r

S

V