A Binomial Tree Setting Has an Up-Move Of $u> 1$ (With Probability

question 7

Multiple Choice

A binomial tree setting has an up-move of $u> 1$ (with probability $p = 0.75$ ) and a down move of $d < 1$ (with probability $1 - p = 0.25$ ) , with $u - 1 = 1 - d$ . The risk-free interest rate per time step is zero, so a dollar invested at the beginning of the period returns $R = \$ 1$ at the end of the period. The risk-neutral probability of an up-move in this setting

• A) Is \(> \frac { 1 } { 2 }\) .
• B) Is \(< \frac { 1 } { 2 }\) .
• C) Is equal to \(\frac { 1 } { 2 }\) .
• D) Is equal to \(p\) .

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