1. This is a problem that has THREE questions. Therefore, please choose THREE answers (one choice for each question) to get full credit for this questions.

   The current price of a non-dividend-paying stock is $50 and the volatility of a non-dividend paying stock is 20% per annum.

   Use a two-step tree to value an American put option on the stock with a strike price of 52 that expires in 1 year. Each step is 6 months, the risk-free rate is 7% per annum with continuous compounding.

   1. Which of the following is closest to the Cox, Ross, Rubinstein parameter u for a tree with a 6-month time step?

   2. What is the risk-neutral probability?

   3. What is the value of the American put option?

   		#1. u= 1.5692
   		#1. u= 1.1519
   		#1. u= 1.2575
   		#2. p= 0.8525
   		#2. p=0.6214
   		#2. p=0.5902
   		#3. American put value = $3.85
   		#3. American put value = $3.19
   		#3. American put value = $3.55