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:

Increased Self-Awareness

A heightened state of being conscious of one's own character, feelings, motives, and desires.

Over-Justification Effect

The phenomenon where extrinsic rewards decrease a person's intrinsic motivation to perform a task because the action is seen as driven by the reward, not personal interest or enjoyment.

Self-Reference Effect

The finding that information bearing on the self is processed more thoroughly and more deeply, and hence remembered better, than other information.

Public Self-Awareness

Looking outward on the public aspects of the self that others can see and evaluate.