Consider a two-step binomial market model \(\left(S_{t}ight)_{t=0,1,2}\) with \(S_{0}=1\) and stock return rates \(a=0, b=1\), and a riskless account priced \(A_{t}=(1+r)^{t}\) at times \(t=0,1,2\), where \(r=0.5\). Price and hedge the tunnel option whose payoff \(C\) at time \(t=2\) is given by

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C = 3 if S = 4, 1 if S = 2, 3 if S = 1.