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 $60 or $45 one year from now.

2. In class 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 = 2 years

using replicating portfolios