Price the following European call option using the 3-level binomial tree with u = 1.2 and d = 0.9: time to expiration τ = 3 months, interest rate is r = 0.06, spot price S0 = 100, strike is E = 115.
Suppose the stock moves up, then down and then up again. Describe the delta-hedging procedure you undertake, calculate cash balances at every node (assume no margins, i.e. everything is bought and sold for its fair value; if you round to cents, arithmetical errors accumulate to about 0.1