Harvard
Business
Corporate
Financial
Management
Options
Exercises
Finance
819
Group
6
Jenny
Wang
Terry
Quartor
Nathan
Advode
We
are
given
the
Project
Alpha
that
has
two
phases.
We
are
asked
to
evaluate
whether
we
should
invest
in
the
first
phase,
in
both
or
either
depending
on
the
present
value
that
we
get
on
each
phase.
We
are
going
to
use
the
binominal
tree
to
evaluate
options.
Based
on
non-‐arbitrage
assumption,
we
will
form
a
replicating
portfolio
to
value
the
option,
since
the
cost
of
replicating
portfolio
equals
the
value
of
the
option.
Payoffs
of
options
and
replicating
portfolio
Options
Replicating
portfolio
Now
Year
1
Cu=Max(uS-‐K,0)
C(K,T)
Cd=Max(dS-‐k,0)
ΔS+B
ΔdS+BRf
Now
Year
1
ΔuS+BRf
Problem
2
A) We
need
to
figure
out
the
price
now
and
what
will
the
prize
be
at
the
maturity.
$100
$120
$80
Now
Maturity
(1st
period)
Rf=1+rf
=
1+10%
=
1.10
K
=
strike
price...