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

question 21

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,let $Q _ { 1 }$ be the risk-neutral probability of a one-period at-the-money call finishing in-the-money.and let $Q _ { 2 }$ be the risk-neutral probability of a two-period at-the-money call finishing in-the-money.Which of the following is true?

• A) \(Q _ { 1 } > q _ { 2 }\)
• )
• B) \(Q _ { 1 } < Q _ { 2 }\)
• )
• C) \(Q _ { 1 } = Q _ { 2 }\)
• )
• D)Depending on the parameters \(\mathcal { U }\)
• And
• \(d\)
• ,more than one of the above is possible.

Evaluate the financial impact of discontinuing a product.

Rank products by profitability to optimize the use of constrained resources.

Make informed decisions on further processing of products or selling them as is, based on cost-benefit analysis.

Analyze special orders and their impact on profitability and production capacity.

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Definitions:

Trichromatic Theory

A theory of color vision that suggests the human eye has three types of receptors sensitive to different wavelengths of light, corresponding to red, green, and blue colors.

Afterimage

A visual image or illusion that continues to appear in one's vision after the exposure to the original image has ceased.

Opponent-Process Theory

A psychological and neurological model that explains complex behaviors and perceptions (including color vision and emotions) as the result of opposing pairs of stimuli.

Young-Helmholtz Theory

A theory suggesting that the human eye perceives color through the response levels of three kinds of cones, each sensitive to one of three colors: red, green, or blue.