In the Cox-Ross-Rubinstein (CRR) Binomial Model, the Volatility Is Given $\sigma = 0.2$

question 18

Multiple Choice

In the Cox-Ross-Rubinstein (CRR) binomial model, the volatility is given as $\sigma = 0.2$ . The risk-free rate of interest is 2%. What is the risk-neutral probability of an up move on a binomial tree with a time step of one month?

• A) 0.45
• B) 0.50
• C) 0.55
• D) 0.60

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Definitions:

Individual Payoffs

Refers to the benefits or rewards an individual receives as a result of making a particular decision or taking a specific action.

Fare Cuts

Reductions in the prices charged for transportation services, such as buses, trains, or airplanes, typically to attract more customers or achieve other strategic goals.

Independent Action

Decisions or actions taken by an individual or entity without coordination or influence from others.

Competing Airlines

Airlines that operate in the same markets and compete against each other for customers, often resulting in various pricing and service strategies.