The following tree diagram denotes the market value of the underlying asset (a stock, above the node) and the cash flow generated by the derivative (below the node). The stock does not pay any dividends over the two periods. Using the risk neutral valuation method, calculate the present value of a derivative. The risk free rate is 6% per period

Value of underlying asset So = $40 Su = $43 Sd = $35 Suu = $50 Sud = $40 Sdd = 30

cash flow generated by the derivatives

S0= $0 Su = $2.5 Sd = $0.75 Suu = $4 Sud = $1.75 Sdd = $0