Consider a Binomial Tree Setting in Which in Each Period $u > 1$

question 17

Multiple Choice

Consider a binomial tree setting in which in each period the price goes up by $u > 1$ (with probability $p$ ) or down by $d < 1$ (with probability $1 - p$ ) . 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, let $Q_1$ be the risk-neutral probability of a one-period at-the-money call finishing in-the-money. and let $Q _ { 2 }$ be the risk-neutral probability of a two-period at-the-money call finishing in-the-money. Which of the following is true?

• A) \(Q _ { 1 } > Q _ { 2 }\) .
• B) \(Q _ { 1 } < Q _ { 2 }\) .
• C) \(Q _ { 1 } = Q _ { 2 }\) .
• D) Depending on the parameters \(u\) and \(d\) , more than one of the above is possible.

Understand the concept and calculation of Days Sales Outstanding (DSO) and its relation to firm's credit and collection policies.

Grasp the economic order quantity (EOQ) model and its relevance in inventory management.

Comprehend the effects of changes in credit policy on sales, receivables, and profitability.

Recognize the role and impact of collection policies on a firm's financial health.

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Definitions:

Security Market Line

A line that represents the risk versus expected return of the market; used to assess the performance of investments compared to the market.

Systematic Risk

The inherent risk associated with the overall market or economy that cannot be eliminated through diversification.

Expected Return

The anticipated return on an investment, calculated as the weighted average of all possible returns with the probabilities of their occurrence.

Recessionary Period

denotes a time of economic decline when the economy reduces its activities significantly, typically marked by decreases in spending and increases in unemployment.