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All main topics / Finance & Investment / Derivatives / Derivatives
8.In a binomial tree created to value an option on a stock, what is the expected return on the option?
B.The return required by the market
C.The risk-free rate
D.It is impossible to know without more information
Answer: C

The expected return on the option on the tree is the risk-free rate. This is an application of risk-neutral valuation. The expected return on all assets in a risk-neutral world is the risk-free rate.
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Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015




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