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.

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