2. Consider a 3 period binomial model with the following parameters: S(0) = 8, u = log2, d= - log 2, r=0, PE (0,1). 1 Consider also a European style derivative U in this market such that U expires worthless if the stock price exceeds Q = 30 or falls below L = 3/2 at some time t {1,2,3} and which otherwise pays the amount Y = max{S(t), t = 0,1,2,3} - min{S(t), t = 0,1,2,3}. Compute the binomial price of the derivative at time t = 0 (max 2 points). Find the value of p which maximizes the probability that U expires in the money and the value of p which maximizes the probability that the return on 1 share of U be positive (max 2 points). 2. Consider a 3 period binomial model with the following parameters: S(0) = 8, u = log2, d= - log 2, r=0, PE (0,1). 1 Consider also a European style derivative U in this market such that U expires worthless if the stock price exceeds Q = 30 or falls below L = 3/2 at some time t {1,2,3} and which otherwise pays the amount Y = max{S(t), t = 0,1,2,3} - min{S(t), t = 0,1,2,3}. Compute the binomial price of the derivative at time t = 0 (max 2 points). Find the value of p which maximizes the probability that U expires in the money and the value of p which maximizes the probability that the return on 1 share of U be positive (max 2 points)