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

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Definitions:

Conscious Mind

The aspect of the mind that is aware of thoughts, feelings, and surroundings at any given moment, enabling conscious decision-making.

Ideas

Ideas are conceptual thoughts, imaginations, or propositions that arise in the mind as a result of mental activity.

Determining Factor

A critical element or condition that affects the outcome or development of a process or event.

Unconscious Mind

A part of the mind that houses desires, memories, and information that are not within a person's conscious awareness, greatly influencing feelings and behaviors.