Problem

4. (Difficult) Compare the replication of an option in a binomial model versus replication...

4. (Difficult) Compare the replication of an option in a binomial model versus replication in a trinomial model by answering the following questions:

(a) How many securities do we need to carry out replication in each model?

(b) Is the risk-neutral probability defined in each model unique?

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Solutions For Problems in Chapter 11