A Binomial Tree with Three-Month Time Steps Is Used to Value

question 13

Multiple Choice

A binomial tree with three-month time steps is used to value a currency option.The domestic and foreign risk-free rates are 4% and 6% respectively.The volatility of the exchange rate is 12%.What is the probability of an up movement?

• A) 0.4435
• B) 0.5267
• C) 0.5565
• D) 0.5771

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Definitions:

Social Facilitation

The tendency for individuals to perform better on simple or well-learned tasks in the presence of others.

Simple Tasks

Tasks that require a minimal cognitive load and can be performed with little to no mental effort, often involving routine actions or straightforward instructions.

Collective Tasks

Activities or responsibilities that require the cooperative effort and participation of a group of individuals to achieve a common goal.

Personal Control

The perceived degree of influence an individual has over their environment and decisions affecting their life.