Consider the particular three-period model with S₀ = $4 (initial stock price), u = 2, d = 1/2, and R = 1 + 1/4. At time 1, the stock price S₁ can be either 2 or 8, at time 2, S₂ is 1,4, or 16, at time 3, S₃ is either 0.5, 2, 8 or 32.

Consider a European put option with strike price K = $4. Explain the dynamic hedging strategy, work out the (re-adjusted) portfolio values (i.e. the dollar amount of stocks and bonds) at each time and for each movement of the stock price. Work out all the numbers in details. What is the no-arbitrage price for the option at time 0?