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

question 9

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, the risk-neutral probability of an at-the-money two-period put finishing in-the-money is _____________ as that of a one-period at-the-money put finishing in-the-money.

• A) At least as high.
• B) At most as high.
• C) Equal to.
• D) More than one of the above is possible depending on the parameters.

---

Definitions:

Budgeting

A financial planning process that entails estimating future income and expenditures to guide spending and saving decisions.

Activity Variance

The difference between planned or budgeted activity levels and actual outcomes.

Budgeting

The process of creating a plan to spend your money, outlining anticipated expenses and income to guide financial operations.

Administrative Expenses

Administrative Expenses are overhead costs not directly tied to a specific function such as manufacturing, production, or sales, and can include salaries, rent, and office supplies.