Consider a stock paying no dividends. Price movements follow the binomial model with the following...
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Consider a stock paying no dividends. Price movements follow the binomial model with the following tree.
Price
State 0, 300
State u, 483.0
State d, 273.0
State uu, 777.63
State ud, 439.53
State du, 439.53
State dd, 248.43
Interest rate is 5% per period.
Using risk-neutral probabilities, compute the value of a digital option, which pays $1 at the end of the second period if the stock price at that time exceeds the initial price at time 0, and nothing otherwise.
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