A Multiperiod Binomial Model Prices an Interest Rate Derivative By

question 4

Multiple Choice

A multiperiod binomial model prices an interest rate derivative by:

• A) computing an expected payoff of the derivative's values using actual probabilities
• B) computing an expected payoff of the derivative's values using pseudo-probabilities
• C) computing an expected value,using actual probabilities,of the derivative's values,discounted by the spot rates
• D) computing an expected value,using pseudo-probabilities,of the derivative's values,discounted by the spot rates
• E) None of these answers are correct.

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Definitions:

Thalamus

A brain structure that acts as a relay center, processing and transmitting sensory and motor signals to the cerebral cortex.

Third Ventricle

A median cleft between the two halves of the brain that is filled with cerebrospinal fluid.

First Ventricle

Also known as the left ventricle, a chamber of the heart responsible for pumping oxygenated blood to the aorta and systemic circulation.

Limbic System

A complex system of nerves and networks in the brain, involved with instinct and mood, controlling basic emotions, and drives such as fear and pleasure.