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:

Factory Overhead

Manufacturing costs that are not raw material or direct labor costs.

Raw Materials

The basic materials from which products are manufactured or made.

Corporate Headquarters

The main office or center of operations for a corporation, where key managerial and administrative activities are conducted.

LIFO Inventory Method

Last In, First Out, an inventory valuation method where the goods purchased last are the first to be sold.