=+(ii) Consider the European put option with strike price equal to £16 and maturity time n = 3.

(a) Find its value at time t = 0;

(b) Suppose the writer follows a perfect hedging strategy. What portfolio should he have at time n = 1 if the stock price at this time was £ 8?

Fig. 13.1 The three-step binary price model for Problem 3.