Consider the binomial model for an American call and put on a stock whose price is $120. The exercise price for both the put and the call is $110. The standard deviation of the stock returns is 0.4, and the risk-free is 10%. The options expire in 120 days. The stock will pay a dividend equal to 3% of its value in 50 days.

(a)Model and compute the price of these options using a four-period tree. (b)Draw the stock tree and the corresponding trees for the call and put price.

(c)Explain when, if ever, each option should be exercised.