1. Use a 2 step binomial tree to value a put option.

All of the steps in your calculation should be shown including the calculation of P and the calculation of each of the option nodes U, D, UU, UD & DD.

• Assume that at each node the stock moves up 20% or down 20%
• The option expires in 2 years. The interest rate is 5% continuously compounded.
• The spot price is 100 and the option strike price is 104
• Early Exercise is not possible with this option.