Question: In the binomial model, suppose that R = (u + d)/2 and d = u1, so that the risk-neutral probability is p = 1/2 (the

In the binomial model, suppose that R = (u + d)/2 and d =

u−1, so that the risk-neutral probability is p∗ = 1/2 (the resulting random walk is symmetric). For the stock price process {S(t)}, consider a European call option whose payoff is given by {M(T) − K}+, where M(t) denotes the maximum of the stock price until time t. Obtain the premium of this call option. Hint: Define S(t) as given in

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