You are trying to value an option on DMH (Ducati). The stock price is currently $70. Next year the stock price will either increase or decrease by $10. The following year the stock price will either increase or decrease (from the year 1 value) by $5. One-year U.S. treasuries currently have an annual return of 4%. Assume that at a one-year U.S. treasury bought in year 1 (maturing in year 2) will have a one-year return of 5%.

a. What is the value on a two-year European put option with a strike price of $78?

b. What is the value of a two-year American put option with a strike price of $78 (assume you can only exercise at year 1 or year 2, not today)?