(20 points) Consider a two-period binomial tree with the following parameters: S0 = 100, u...
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(20 points) Consider a two-period binomial tree with the following parameters: S0 = 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
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