If the Binomial Model Is Extended to Multiple Periods for a Fixed

question 47

Multiple Choice

If the binomial model is extended to multiple periods for a fixed option life,which of the following adjustments must be made?

• A)the up and down factors must be increased
• B)the risk-free rate must be increased
• C)the up and down factors and the risk-free rate must be decreased
• D)the initial stock price must be proportionately reduced
• E)none of the above

---

Definitions:

Principal-Agent Problem

A dilemma in economics where one party (the agent) is tasked to make decisions on behalf of another party (the principal), leading to potential conflicts of interest.

Employer-Employee Relationship

The formal association between a company or organization and its workers, governed by an employment contract and labor laws.

Take-Home Pay

The amount of income left after deductions such as taxes and retirement contributions.

Fringe Benefits

Additional compensation provided to employees beyond their normal wages or salaries, such as health insurance, retirement plans, and paid time off.