Consider a European put option with the strike price of $50. Suppose the current price for the underlying risky asset is S0=$50. The risk-free rate in the economy is rf=5%per year. The option matures 1 year from now. The underlying asset does not pay dividends. Price this option using the method of replicating portfolios and believing that the price for the underlying asset may be either $60or $45one year from now.

In this example, we were able to extend the binomial tree method of pricing options to a multiperiod case. Think how the method of replicating portfolios can be extended to multiple periods. Price the option above when T=2years using replicating portfolios