A European put written on shares has strike K = $32. Consider a two-step binomial model. Using crr notation, the underlying asset prices are calculated using S = $34, u = 1.2 and d = 1/u . The variable returns are R(0, 0) = 1.03 , R(1, 1) = 1.02 and R(1, 0) = 1.04 .

(a) Calculate the risk neutral probabilities (0, 0), (1, 1) and (1, 0)

(b) Construct a two-step binomial pricing tree for the European put.

(c) A European call has the same strike price, underlying asset and time to expiry as the European put. Construct a two-step binomial pricing tree for the European call.