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:

Foreign Corporation

A corporation incorporated in one state doing business in another state. See also alien corporation.

Conditional Indorsements

Endorsements made on a negotiable instrument that specify certain conditions that must be met before the endorsement is considered valid.

Effective

Producing a desired or intended result, often used in contexts relating to efficiency, productivity, or the power to produce a specified effect.

Payee

The individual or entity to whom a payment is directed or owed.