Which of the Following Statements Is FALSE

question 12

Multiple Choice

Which of the following statements is FALSE?

• A)After we have constructed the binomial tree and calculated the probabilities in the risk-neutral world,we can use them to price the derivative by simply discounting its expected payoff (using the risk neutral probabilities)at the risk-free rate.
• B)By using the probabilities in the risk-neutral world we can price any derivative security-that is,any security whose payoff depends solely on the prices of other marketed assets.
• C)To ensure that all assets in the risk-neutral world have an expected return equal to the risk-free rate,relative to the true probabilities,the risk-neutral probabilities underweight the bad states and overweight the good states.
• D)In Monte Carlo simulation,the expected payoff of the derivative security is estimated by calculating its average payoff after simulating many random paths for the underlying stock price.

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Definitions:

Cycle Closing

Cycle Closing refers to the process of finalizing all transactions and balances for a specific accounting period, ensuring that all financial activities within that period are accounted for and concluded.

Simple Interest

Simple interest is a method of calculating the interest charge on a loan based on the original principal amount and the interest rate, without compounding over time.

Monthly Basis

A term referring to events or calculations repeated or measured every month.

Round Answers

The process of adjusting the decimal places of a number to simplify it, based on specific rounding rules.