Suppose You Are Modeling the Price Evolution of a Stock

question 10

Multiple Choice

Suppose you are modeling the price evolution of a stock on a tree using a general version of the CRR model.The stock price is stochastic (lognormal) ,but the rate of interest each time step may not be the same,and the time step itself may be different across periods.The following is sufficient for a binomial tree representation of the stock price process to be recombining:

• A)The volatility of the stock is constant each period,and the time step and interest rate are different each period.
• B)The volatility of the stock is constant each period,the time step on the tree is the same each period,and the interest rate may be different each period.
• C)The volatility of the stock is constant,the time step on the tree is the different each period,and the up and down probabilities are equal.
• D)The volatility of the stock is different each period,the time step on the tree is the same each period,and the interest rate is the same each period.

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Definitions:

Interest in Land

Legal rights or investments in real estate that involve ownership or other financial claims on the property.

Verbal Evidence

Evidence presented in the form of words, spoken or written, as opposed to physical evidence or demonstrations, used in legal proceedings.

Statute of Frauds

A legal principle that requires certain types of contracts to be in writing in order to be enforceable.

Illegal

Actions or conduct that the law forbids and for which there are punitive consequences.