The Binominal Distribution

question 31

Multiple Choice

The binominal distribution:

• A)is a discrete distribution used to model the number of occurrences in some unit of measure.
• B)assumes that the average number of occurrences per unit is a constant and that occurrences are independent.
• C)is symmetric irrespective of the value of the probability of success.
• D)models n independent replications of a Bernoulli experiment, each with a probability p of success.

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Definitions:

Protective Put

An options strategy wherein an investor holds a long position in a stock and buys put options on that same stock to protect against the stock's decline in price.

T-bill Rate

The yield or interest rate paid to investors of U.S. Treasury bills, a short-term government security.

Hedge Ratio

The ratio used to determine the appropriate amount of hedging required to protect a position or portfolio from price fluctuations.

Option Smirk

A pattern on the implied volatility graph for options across different strike prices that shows asymmetric volatility, often indicating market anticipation of movement.