we had an example of an American put with the following data:S0 = 10, u = 2, d = 0.8, r = 0.1, N = 2, K = 17
Work out the full replicating portfolio for this option,
explaining what happens when the
holder of the option decides to exercise (or not) at each state. What turn of events will causeyou, as the writer of this option, to make the greatest proﬁt, assuming that any cash thatyou pull out of the replicating portfolio is invested in a risk-free asset?