In Order for a Binomial Tree to Recombine, the Following $u$

question 22

Multiple Choice

In order for a binomial tree to recombine, the following condition is necessary and sufficient:

• A) The time-step in the tree must remain constant over time.
• B) The up shift factor \(u\) and down shift factor \(d\) must be such that \(u \times d = 1\) .
• C) The up shift factor \(u\) and down shift factor \(d\) must be such that \(u \times d =\) a constant.
• D) The rate of interest must be zero.

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Definitions:

Equilibrium Price

The cost at which the amount of a product available matches the amount of the product desired.

Price Ceiling

A government-imposed limit on how high the price of a product can be charged in the market, usually to protect consumers.

Legal Minimum

A legally established lower boundary on the price at which a good or service can be sold in the market.

Market Price

The contemporary price point at which goods or services can be transacted in a trading space.