Using risk-neutral valuation, derive a formula for a derivative that pays cash flows over the next two periods. Assume the risk-free rate is 4 percent per period. The underlying asset, which pays no cash flows unless it is sold, has a market value that is modeled in the adjacent tree diagram.
![996_3b3fed5d-1121-43af-b3d5-1db42b24f502.png](https://secure.tutorsglobe.com/CMSImages/996_3b3fed5d-1121-43af-b3d5-1db42b24f502.png)
The cash flows of the derivative that correspond to the above tree diagram are
![1320_276a4aa2-7111-4ad3-953a-5fcbb53001b2.png](https://secure.tutorsglobe.com/CMSImages/1320_276a4aa2-7111-4ad3-953a-5fcbb53001b2.png)
Find the present value of the derivative.