CoboCards App FAQ & Wishes Feedback
Language: English Language
Sign up for free  Login

This flashcard is just one of a free flashcard set. See all flashcards!

All main topics / Finance & Investment / Derivatives / Derivatives
220
20.A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%. Which of the following are true?
A.The parameters p and u are the same for both trees
B.The parameter p is the same for both trees but u is not
C.The parameter u is the same for both trees but p is not
D.None of the above
Answer: C


The formula for u is the same in the two cases so that the values of the index on its tree are the same as the values of the stock on its tree. However, in the formula for p,  r is replaced by r−q.
New comment
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015

Cancel
Email

Password

Login    

Forgot password?
Deutsch  English