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3) The volatility of a non-dividend-paying stock whose price is $20, is 10%. The risk-free rate is 7% per annum (continuously compounded) for all maturities.

3) The volatility of a non-dividend-paying stock whose price is $20, is 10%. The risk-free rate is 7% per annum (continuously compounded) for all maturities. Use a two-step tree to calculate the value of a derivative that pays off [max(ST! 18, 0)]2 where ST is the stock price in ten months?

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