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3.[8 points) Consider a 2-period CRR model with d=0.9, r = 5%, u = 1.5 and S(0) = $100. The stock pays $8 dividend at time 1 and time 2. Consider the American f-option with payoff f(0) = 12 - 1001 (a) (5pts) Draw the payoff tree and calculate the pricing tree. (b) (Ipts) When is the American option executed before maturity? (c) (2pts) Assume you sold the option to a buyer who does not execute at the node from b) and forces you to replicate the terminal payoff for him. Using B(0) = $60, what is the replicating strategy at the node from b)? How much money do you make from that buyer? Hint: the values for and are in the set { A}. The values F(0) and 8, are integers. 3.[8 points) Consider a 2-period CRR model with d=0.9, r = 5%, u = 1.5 and S(0) = $100. The stock pays $8 dividend at time 1 and time 2. Consider the American f-option with payoff f(0) = 12 - 1001 (a) (5pts) Draw the payoff tree and calculate the pricing tree. (b) (Ipts) When is the American option executed before maturity? (c) (2pts) Assume you sold the option to a buyer who does not execute at the node from b) and forces you to replicate the terminal payoff for him. Using B(0) = $60, what is the replicating strategy at the node from b)? How much money do you make from that buyer? Hint: the values for and are in the set { A}. The values F(0) and 8, are integers

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