A. Consider a European call option on a stock that is currently traded at $20. The option has a time to maturity of 12 months and a strike of $21. Use a 3-step binomial model to price the option. Assume the stock volatility of 25% p.a and a risk-free rate of 4% p.a continuously compounded. Show all workings.

b) Consider an up and out European barrier option on the same underlying stock. An up and out barrier option is active from the beginning, but expires immediately and is worth nothing if the underlying stock hits the barrier value.

Use a 3-step binomial model to price an up and out European barrier call option with a barrier at $25. Make the same assumptions as part a) - the stock price is $20, expected volatility of 25% p.a, strike of $21, risk free rate of 4% p.a continuously compounded and time to maturity of 12 months. Show all workings.

Please answer part B if you would answer 1 question only