Hi Aaron,your help will be really appreciated . I am stuck on this problem from jarrow and turnbull divide 1 year into two six month intervals or h=0.5(discretization interval) , u=1.2456 d= 0.8149 , r(h) = exp(0.05x0.5)= 1.0253up probabilty p= r(h)-d / u-d = 0.4885 so 1-p= 0.5114. A special kind of one-year put option is written on a stock. The current stock price is 40 and the current strike price is 40(at initiation) at t=0. At month 6, if the stock price is below 35 the strike price is lowered to 35; otherwise it remains unchanged. The risk-free interest rate is 5 percent per annum; the volatility of the stock is 35 percent per annum. question 1> construct binomial lattice of stock price and show calculation question 2> construct binomial lattice of fair no arbitrage option values at each step pf tree or value synthetic put option .now i found out Su = 49.82 and (putvalue at t=1)p1=0 , Suu=62.05 and p2=0 , Sd=32.59 , sdd=26.55I am stuck on how to shape the binomial latice and how to price option at t=1 down move and t=2 down move.your help will be appreciated. pls PM me. kjohn97@yahoo.co.uk

I know you addressed your query to aron but i will take a stab at answering your queryMy approach would be to build a binomial tree and the terminal values are either 6 month european option svalue with the stock price price at the terminating node and a strike of 40 or for those nodes below 35 with the stock price at the node and a strike of 35 ... and then roll back as you would for any option.