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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.

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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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A non-dividend paying stock is currently trading at USD 25. You are looking to find a no-arbitrage price for a 1-year American call using a two-step binomial tree model for which the stock can go up or down by 25%. The risk free rate is 10% and you believe that there is an equal chance of the stock price going up or down. What is the risk-neutral probability of the stock price going down in a single step?

A. 22.6%
B. 39.8%
C. 50.0%
D. 68.3%

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A risk manager for Bank XYZ, Mark is considering writing a 6 month American put option on a non- dividend paying stock ABC. The current stock price is USD 50 and the strike price of the option is USD52.In order to find the no-arbitrage price of the option Mark uses a two-step binomial tree model. The stock price can go up or down by 20% each period. Mark's view is that the stock price has an 80% probability of going up each period and a 20% probability of going down. The annual risk-free rate is 12% with continuous compounding. The no-arbitrage price of the option is closest to:

A. USD2.00
B. USD 2.93
C. USD 5.22
D. USD 5.86

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A 1-year American put option with an exercise price of ＄40 will be worth ＄10.00 at maturity with a probability of 0.25 and ＄0.00 with a probability of 0.75. The current stock price is ＄36.The discount rate is 5%. The optimal strategy is to:

A. Exercise the option because the payoff from exercise exceeds the present value of the expected future payoff.
B. Not exercise the option because the payoff from exercise is less than the discounted present value of the future payoff.
C. Exercise the option because it is currently at-the-money.
D. Not exercise the option because it is out-of-the-money.

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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 1-year American put option with an exercise price of ＄40 will be worth ＄10.00 at maturity with a probability of 0.25 and ＄0.00 with a probability of 0.75. The current stock price is ＄36.The discount rate is 5%. The optimal strategy is to:

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.