In the Event Tree Used in the Binomial Approach to Option

question 2

Multiple Choice

In the event tree used in the binomial approach to option valuation,at each node the value either increases or decreases by the proportion u or d,respectively.If the annualized volatility of the underlying asset's value is 10 percent per year and the horizon is six months,what are the up-movement u and down-movement d values?

• A)1.0488 and 0.9534
• B)1.0513 and 0.9511
• C)1.0733 and 0.9317
• D)1.2505 and 0.8000

---

Definitions:

Purely Competitive

A market structure characterized by many buyers and sellers, all of whom are price takers offering homogenous products.

Downsloping

Characteristic of a curve or line on a graph that shows a decrease in value as it moves from left to right, commonly used in economics to describe demand curves.

Market Demand

The aggregate amount of a product or service all buyers in a market are prepared to buy at different price points.

Competitive Industry

An industry structure where many firms compete for market share, with no single firm dominating the market.