Consider a speculator seeking to trade volatility using American put options written against a dividend paying stock. To do so she seeks an estimate of implied volatility using the following information Stock price: $40 Strike: $36 Time to maturity: 6 months Dividend: paid at the end of 3 months, expected to be a constant 10% proportion of the share price at that time Risk free rate: 5% p.a. continuously compounded Option price: $2.01

Show how you could use a two-period binomial model to calculate the implied volatility on the above American put. You are only required to show calculations for the first TWO iterations. Comment on how you would proceed to solve for IV from this point.