Question: a) Use a 2 step binomial tree to value a new exotic derivative. Draw the tree and label the stock prices and derivative values at

a) Use a 2 step binomial tree to value a new exotic derivative. Draw the tree and label the stock prices and derivative values at each node. The option expires in 6 months. The interest rate is 10% annually continuously compounded. The Strike Price (K) is 100. The spot price is at 100. U= 1.2 and D= 0.8 for each quarterly period. The payoff of this derivative is (ST/K). By this I mean that the payoff is the price of the underlying stock divided by the Strike Price.

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