In the Jarrow-Rudd (JR) Binomial Model, the Volatility Is Given $\sigma = 0.2$

question 13

Multiple Choice

In the Jarrow-Rudd (JR) 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

---

Definitions:

Gas-guzzling SUV

A sport utility vehicle (SUV) that has very low fuel efficiency, consuming large amounts of gasoline relative to its distance traveled.

Rationalize Behavior

The process of offering logical, plausible explanations for behaviors that might otherwise appear illogical or inappropriate.

Environmental Causes

Factors related to one's surrounding environment, including physical, social, and cultural aspects, that influence an individual's behavior or development.

Vegetarian

Describes a person who does not eat meat, and sometimes other animal products, especially for moral, religious, or health reasons.