Exam 4: Option Pricing Models: the Binomial Model

A stock priced at 50 can go up or down by 10 percent over two periods.The risk-free rate is 4 percent.Which of the following is the correct price of an American put with an exercise price of 55?

When the number of time periods in a binomial model is large,a European call option value does what?

In a non-recombining tree,the number of paths that will occur after three periods is

In a two-period binomial world,a mispriced call will lead to an arbitrage profit if

When the number of time periods in a binomial model is large,what happens to the binomial probability of an up move?

In the binomial model,if an option has no chance of expiring out-of-the-money,the hedge ratio will be

When puts are priced with the binomial model,which of the following is true?

In a recombining binomial model with n periods,the number of outcomes is n + 1.

One way to model an option with dividends in the binomial framework is for the stock price minus the present value of the dividends to grow by the up and down factors.

A riskless hedge involving stock and puts requires a long position in stock and a short position in puts.

Determine the value of u for a three period binomial problem when the option's life is one-half a year and the volatility is 0.48.Use the model for u that does not require the risk-free rate.

The binomial option pricing formula is based on the weighted average of the next two possible values,discounted back to the present.

The values of u and d are which of the following?

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions about a call with an exercise price of 80. -What would be the call's price if the stock goes down?

The binomial option pricing formula will conform to the European lower bound.

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent.The risk-free rate is 4 percent.Assume a one-period world.Answer questions about a call with an exercise price of 80. -What is the hedge ratio?

When pricing a put with the binomial model,the up and down probabilities are reversed.

In the binomial model,if a call is overpriced,investors should sell it and buy stock.

Suppose S = 70,X = 65,r = 0.05,p = 0.6,C_u = 7.17,C_d = 1.22 and there is one period left in an American call's life.What will the option be worth?

If the stock pays a specific dollar dividend and the stock price,to include the dividend,follows the binomial up and down factors,which of the following will happen?