A Tree Is Constructed to Value an Option on an Index

question 19

Multiple Choice

A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%.

• A) The parameters p and u are the same for both trees
• B) The parameter p is the same for both trees but u is not
• C) The parameter u is the same for both trees but p is not
• D) None of the above

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Definitions:

Equity Financing

The process of raising capital through the sale of shares in a company, providing investors ownership interests.

Debt Financing

The raising of capital through borrowing money that must be repaid over time, usually with interest.