Construct a 3 period tree diagram and associated probability distribution:

The inputs are :

S = 100the stock price

=0.4the volatility per annum

t = 0.25the time to expiration (3 months)

n = 3the number of periods

r = 0.12the per annum rate of return compounded monthly.

You must compute u, d, rr, p, q,

Now from the above, compute C100, the value now of the 100 call as per :

where E is the expected value of the call option at the expiration .