Let the binomial model with T = 1, S(sub zero) = $50, d = 0.5, u = 2 and r = 0.25
i) Consider X be the contingent claim that has value (S(sub one) - 40)^2. Determine the hedge strategy which replicates X
ii) Determine arbitrage free price for X
iii) Assume C(sub zero), price for X, is $2 above arbitrage free price you found in (b). Explain the strategy in stock, bond and option which is arbitrage.