Consider binomial model with S0 = 100, u = 1.2, d = .9 and r = .05. Use a three period (two step) binomial tree and replicating portfolios or perfect hedging to price a long straddle (holding both a long call option and a long put option on the same stock with the same strike price) with K = 110. This pays at maturity the absolute value of the difference between the stock price at maturity and the strike price,

Payoff = |ST ? K|

Here is the stock price tree:

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