1.   A Bermuda option is a type of option that a buyer canexercise the option only on predetermined dates. Consider a Bermudan put optionon a non-dividend paying stock where the stock price is $50, the strike priceis $40, the risk-free rate is 4% per annum with continuous compounding, thevolatility is 40% per annum, the time-to-maturity is 6 months and the predetermineddates are every two months.

a.   Calculate u, d, and p for a seven-step binomial tree.

b.   Value the option using a seven-step binomial tree.