Which of the following best describes the binomial option pricing formula?
A. The expected payoff is discounted at the risk- free rate plus a risk premium.
B. The spot price is compounded at the risk- free rate minus the volatility premium.
C. The expected payoff based on risk- neutral probabilities is discounted at the risk-free rate.
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You again observe a €100 price for a non- dividend- paying stock with the same inputs as the previous box. That is, the call option has one year to mature, the periodically compounded risk- free interest rate is 5.15%, the exercise price is €100, u = 1.35, and d = 0.74. The put option value will be closest to:
A. €12.00.
B. €12.10.
C. €12.20.
The most correct statement about the binomial option pricing formula is that:
A. The discount rate to calculate the option price is the risk-free rate
B. The discount rate to calculate the option price is the risk-free rate plus a risk premium
C. The spot price is compounded at the risk-free rate to get the expected payoff
Knowledge about the degree of risk aversion of investors is most likely needed for:
A. the pricing of assets, but not for the pricing of derivatives.
B. both the pricing of assets and of derivatives.
C. the pricing of derivatives, but not for the pricing of assets.
The “up－move factor” in a binomial tree is best described as:
A. the probability that the variable increases in any period
B. one plus the percentage change in the variable in each period.
C. the increase in the value of the variable in the next period.
D. one minus the “down-move factor” for the binomial tree.
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