In the Binomial Pricing Model, an Option Is Priced Using

question 80

True/False

In the binomial pricing model, an option is priced using a replicating portfolio that typically consists of a risk-free bond and the asset underlying the option.

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Definitions:

Coupon Bond

A type of bond that offers interest payments through coupons to the bondholder until its maturity, when the principal amount is reimbursed.

Accrued Interest

The interest that has accumulated on a bond since the last interest payment up to, but not including, the purchase (or sale) settlement date.

Interest Days

The number of days over which interest is calculated on a loan or financial instrument.

Coupon Bond

A type of bond that pays the holder interest at a fixed rate, typically semi-annually, until maturity when the face value is repaid.