Price a two year European put with a strike price of $52 on Erin Co. Assume that the current stocks price is $50. Suppose there are only 2 time steps of one year duration and in either step, the stock price either moves up by 20% or down by 20%. Assume the annual risk-free rate is 5%. Use either the risk- neutral probability or delta hedge approach to answer the following.

a. What is the risk-neutral probability p*?

b. What is the P0, the Put price at time 0?

c. At the end of time period 1, if Su is realised (Erin stock goes up), describe how you should construct the replicating, hedged portfolio at time 1.

d. If Su is realised at the end of year one, what is the value of the put at the end of year one, Pu?

e. At the end of time period 1, if Sd is realised (Erin stock goes down), describe how you should construct the replicating, hedged portfolio at time 1.

f. If Sd is realised at the end of year one, what is the value of the put at the end of year one, Pd?

g. Finally, if this were now an American put, would you exercise it early? Describe when it might it worthwhile to exercise it early.