1. 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 $12. Make the same assumptions as part a) - the stock price is $10, it goes up/down by +/- 10% each period, strike of $8, risk free rate of 5% p.a and time to maturity of three months.