Consider a Binomial Tree Setting in Which in Each Period $u = 1.10$

question 18

Multiple Choice

Consider a binomial tree setting in which in each period the price goes up by $u = 1.10$ (with probability $p = 0.60$ ) or down by $d = 0.90$ (with probability $1 - p = 0.40$ ) . The risk-free interest rate per time step is zero, so a dollar invested at the beginning of the period returns a dollar at the end of the period. In this setting, the risk-neutral probability of a two-period call with strike $K = 95$ finishing in-the-money is

• A) 0.25
• B) 0.36.
• C) 0.75
• D) 0.84