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comment How to price this option without using BS framework
Two period binomial? If stock goes to H or D, then price of the replicating portfolio is (1 - D) / (H - D).
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revised How to perform risk factor calculation?
Added subscript i to alpha
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comment How to perform risk factor calculation?
I think all of the theories have zero intercepts (i.e., only one risk-free rate)? Empirically you include the intercept to avoid forcing $\alpha_i = 0$ so that you can test if there is a return not correlated with the risk factors.
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