In the putback option at time 3 you can buy the stock for the lowest price seen in the past and the sell it at its current price for a profit of V3 D S3  min 0m3 Sm Suppose that the stock follows the binomial model with S0 D 4; u D 2; d D 1=2, and r D 1=4.

(a) Compute the value function Vn.a/ and the replicating portfolio

n.a/ for the three period call option with strike 4.

(b) Check your answer for V0 by using V0 D E.V3=.1 C r/3/.