The Formula for Pricing Options by Repeated Application of Risk-Neutral $\pi$

question 12

Multiple Choice

The formula for pricing options by repeated application of risk-neutral pricing is given by which of the following formulas,where $\pi$ = [(1 + R) - D]/(U - D) ;U and D are the up and down factors,respectively; (1 + R) is the dollar return;option_U is the option price at the next node in the up state;and option_D is the option price at the next node in the down state?

• A) option price= [ \(\pi\) * option _U + (1 - \(\pi\))* option_D] * (1 + R)
• B) option price = [ \(\pi\)* option _U + (1 - \(\pi\))* option_D] / R
• C) option price = [ \(\pi\)* option _U +(1 - \(\pi\))*option_D] / (1 +R)
• D) option price = [ \(\pi\)² * option _U + (1 -\(\pi\))²*option_D] * (1 +R)
• E) None of these answers are correct.

---

Definitions:

The Eight

An early 20th-century Hungarian group of avant-garde artists who sought to introduce modernist trends into Hungarian art, challenging academic traditions.

Underclass

A social group at the bottom of a society's hierarchy, often facing poverty and marginalization.

John Sloan

An American artist known for his urban genre scenes and ability to capture the essence of New York City life in the early 20th century.

Elegy

A poem or song written in honor of someone deceased, typically expressing sorrow or lamentation.