Consider a Stock Index Currently Trading at 128 $\mathcal { L } = 1.08$

question 30

Multiple Choice

Consider a stock index currently trading at 128. You have modeled the evolution of this index in a binomial tree and have come up with the following parameters: $\mathcal { L } = 1.08$ , $d = 0.93$ . The gross risk-free rate per step of the binomial tree is $R = 1.03$ and the dividend yield on the index is $\delta = 0.01$ . The risk-neutral probability of an up-move in this setting is

• A) 0.598
• B) 0.660
• C) 0.667
• D) 0.736

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Definitions:

Guaranteed Profit

A commitment or assurance, often not feasible, that an investment will yield a positive return.

Reduced Competition

A market condition where there are fewer rivals competing for customers, often leading to increased prices and reduced innovation.

Price Discrimination

The strategy of selling the same product to different buyers at different prices based on factors like age, location, or purchase volume, often to maximize profits.

Fair Competition

A level playing field in business where no one has an unfair advantage, ensuring healthy rivalry among companies.