A stock is currently trading at $80. You wish to value 1-year options using a binomial

model. The stock will either increase in value by 25% or fall in value by 20% over

the coming year. The annual risk-free rate is 4%. The stock is not expected to pay

any dividends over this coming year.

(a) (3 points) How would you construct a leveraged equity portfolio to perfectly

replicate a European put with a strike price of $85?

(b) (3 points) Find the value of a European put with a strike price of $85