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:

Sample Mean

The average value of a sample set, calculated by summing the sample points and dividing by the number of samples.

Standard Error

The standard deviation of the sampling distribution of a statistic, often used in the estimation of the mean.

Point Estimate

A single value or statistic that serves as the best guess or most plausible value of a population parameter based on sample data.

Sample Proportion

The fraction or percentage of the sample that represents a particular characteristic or attribute within the population.