Hi, In the solutions for this question, how is the 'Value of European Option at t=2' calculated? I am not sure how they got 0.97 for Up and 12.71 for Down? Thanks
If the share price is 84.5 at time t=2, then we need to consider the binomial branch that will take us to time t=4. We can do this using the risk-neutral pricing approach. First we need the discover what the European option payoff will be at expiry; it's either going to be 0 (if the share price goes up a second time to 109.85), or 2.4 (if the share price goes down to 67.6). Then we have: \[ c_2=e^{-2\times 4\%}(q\times 0 + (1-q)\times 2.4 ) \] That will get you to the 0.97
