Consider a Binomial Tree Setting in Which in Each Period $\mathcal { U } > 1$

question 6

Multiple Choice

Consider a binomial tree setting in which in each period the price goes up by $\mathcal { U } > 1$ (with probability $p$ ) or down by $d < 1$ (with probability $1 - p$ ) .The risk-free interest rate per time step is zero,so a dollar invested at the beginning of the period returns a dollar at the end of the period. In this setting,the risk-neutral probability of an at-the-money two-period put finishing in-the-money is _____________ as that of a one-period at-the-money put finishing in-the-money.

• A)At least as high.
• B)At most as high.
• C)Equal to.
• D)More than one of the above is possible depending on the parameters.

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Definitions:

IUPAC Name

The systematic name given to a chemical substance, based on a set of standard rules by the International Union of Pure and Applied Chemistry.

Amine

An organic compound derived from ammonia; characterized by the presence of a nitrogen atom bonded to carbon atoms.

Boiling Point

The specific temperature at which a liquid changes to gas at a given pressure, indicative of a substance's volatility.

Compounds

Substances made up of two or more elements chemically combined in fixed ratios, often resulting in properties different from the constituent elements.