Use the Following Data for a Two-Period Binomial Model to Answer

question 24

Multiple Choice

Use the following data for a two-period binomial model to answer the questions that follow.
- The stock's price S is $100.After three months,it either goes up and gets multiplied by the factor U =1.13847256,or it goes down and gets multiplied by the factor D = 0.88664332.
- Options mature after T = 0.5 year and have a strike price of K = $105.
- The continuously compounded risk-free interest rate r is 5 percent per year.
- Today's European call price is c and the put price is p.Call prices after one period are denoted by c_U in the up node and c_D in the down node.Call prices after two periods are denoted by c_UD in the "up,and then down node" and so on.Put prices are similarly defined.
-The stock price tree (in dollars) is given by:

• A) S = 100;US = 113.8473 and DS = 88.6643;U ²S = 135.3238,UDS = 100,and D²S = 74.2672
• B) S = 100;US = 113.8473 and DS = 88.6643;U ²S = 129.6120,UDS = 100.9419,and D²S = 78.6136
• C) S F= 100;US = 113.8473 and DS = 88.6643;U ²S = 123.9862,UDS =101.5113,and D²S =83.1104
• D) S = 100;US = 113.8473 and DS = 88.6643;U ²S =130.2617,UDS=101.4479,and D²S = 79.0077
• E) None of these answers are correct.

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Definitions:

Natural Extinction

The process by which species become extinct due to natural factors such as environmental changes, loss of habitat, or failure to adapt to competition.

Tropical Rain Forests

Diverse ecosystems located around the Earth's equator characterized by high annual rainfall, constant warm temperatures, and a vast variety of plant and animal life.

Deforestation

The large-scale removal of forest or tree cover, often to make land available for agricultural, urban, or other types of development, leading to ecological imbalances.

Desertification

The process by which fertile land becomes desert typically as a result of drought, deforestation, or inappropriate agriculture.