Solution

ID: past-exam-of-the-mathematics-course-of-the-university-of-cambridge/2006/ii/paper-1/28i/c/solution

Only paths whose first move is down have positive payoffs. On the down-up path the raised strike gives , and on down-down it gives . Their probabilities are and . Hence
The payoff at the middle stock-price node is path dependent: the up-down path still has strike 864 and pays zero.

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