Question: A stock (S=85) increases per year by u = 1.22, or declines by d = 1/u. The risk-free rate (discrete) is equal to 3% p.a.

A stock (S=85) increases per year by u = 1.22, or declines by d = 1/u. The risk-free rate (discrete) is equal to 3% p.a.

Calculate the price of an American put option with a time to maturity of two years and a strike price K = 99 by using a two-step binomial tree. Show all the calculations.

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