Illustrates an example of binomial model as complete market

Question

Illustrates an example of binomial model as complete market?

Answer 1

Consider, for illustration, the binomial model in that there are two states of the world at the next time step, and here are also two securities as cash and the stock. It is a complete market. Then, after two time steps here will be three possible states of the world, to assume the binomial model recombines therefore an up–down move gets you to similar place as down–up. Therefore you might think as you require three securities for a complete market. This is not the case because after the first time step you get to change the quantity of stock you are holding; it is where the dynamic part of the replication combines.