In the Binomial Model, If the Stock Moves Up by a Factor

question 24

Multiple Choice

In the binomial model, if the stock moves up by a factor $u$ and down by a factor $d$ , and a $1 investment in a risk-free bond returns an amount $R$ per time step, which of the following statements is true in a market that is free from arbitrage?

• A) \(d < u < R\)
• B) \(\mathcal { U } < R < d\)
• C) \(d < R < u\)
• D) \(R < d < u\)

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Definitions:

Characteristics

Traits or features that distinguish a person, object, or phenomenon from others.

Competitive Situation

A scenario where entities vie for dominance or advantage in a particular market or arena, often characterized by rivalry.

Non-Zero-Sum

In game theory, scenarios in which the total win or loss of all participants combined is not equal to zero, meaning one party's gain is not necessarily another's loss.

Distributive Situation

A scenario in negotiation or conflict resolution where parties vie for the division of limited resources.