Question: Consider the three-period binomial model with S0 := 2, u := 2, d := 0.5, and r := 0.25. Determine the prices at time zero

Consider the three-period binomial model with S0 := 2, u := 2, d := 0.5, and r := 0.25. Determine the prices at time zero of the following derivatives with the same strike K := 1 and expires at N :=3 compute:

A) An American straddle with intrinsic value at n given by |S K|.

B) An European straddle at n given by |Sn-K|. and delta 0

C) finally, compute the value of a financial instrument that pays 1 the first time the stock reaches 4. If the stock never hits 4, the financial instrument expires worthless.

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