Ask the Class to Prove That Option Pricing Is Consistent

question 4

Essay

Ask the class to prove that option pricing is consistent with standard discounted cash flow calculations.Propose that students form groups and develop two binomial trees for the same set of data.One tree should use real probabilities as defined in chapter 11 and the other as defined in chapter 10.

---

Definitions:

Absolute Threshold

The minimum level of stimulus intensity required for a stimulus to be detected at least 50% of the time by an observer.

Difference Threshold

The minimum difference in stimulation that a person can detect 50% of the time, also known as the "just noticeable difference."

Retina

The light-sensitive layer of tissue at the back of the inner eye, which converts light images into nerve signals sent to the brain.

Sensory Receptors

Specialized cells or structures in the body that respond to external stimuli, such as light, sound, touch, or chemicals, and send signals to the brain.