Let S=$300, K=$300, r=10% risk-free interest rate, (continuously compounding), T=3 years, n=3, three-period binomial tree, =6.5%, continuous dividend yield on the stock index, u=1.25, and d=0.7.

a) Construct the binomial tree for the stock index.

b) Compute the prices of American and European calls.

c) Compute the prices of American and European puts by using risk-neutral probability, p*, approach.