Each period there is again two branches with jumps

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Unformatted text preview: ume that this state of affairs persists over time. Each period there is again two branches with jumps defined by the same factors and : ✶ ✏ ✏✏ ✏✏ ✏ ✏✏ ✯ ✟ ✟ ￿￿￿ ✟ ￿￿ ￿￿ ✟✟ ￿ ✟ ✟✟ ❍ ❍❍ ❍ Note that since distinct nodes ✶ ✏ ✏ ✏✏ ❍❍ ✏✏ ❍ ✏✏ ❥ ❍￿ ￿￿ ￿￿ ￿￿ ￿ , the four nodes in period two really are only three ✯ ✟ ✟✟ ✟ ✟ ✟✟ ✟ ✟ ❍ ❍❍ ❍ ✟ ✟✟ ✯ ✟ ❍❍ ✟✟ ❍❍ ✟ ❍ ✟✟ ❍❍ ❥ ❍ ✟✟ ❍❍ ❍❍ ❍❍ ❍ ❥ ❍ ✯ ✟ ✟✟ ✟ ❍ ❍❍ ❥ ❍ 15.1 Multiple Periods 135 The pricing exercise of the previous chapter can be repeated for every node in a “binomial tree” constructed by replicating the one-period model. To determine the value at a particular point in time, one starts at the end of the tree, where the values of the call option are simply determined as the maximum of the stock price minus strike price, or zero. One then works backw...
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