Suppose You Are Modeling the Price Evolution of a Stock

question 11

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:

Market Research

The process of gathering, analyzing, and interpreting information about a market, including about its potential customers.

Financial Reports

Formal records or statements summarizing the financial activities, position, and performance of a business, organization, or individual.

Temporal

Relating to time or the sequential order in which events occur.

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