Question

In a four-period binomial model, if the stock price is currently $31 and can go up by 11% or down by 9.5% each period, what is the stock price after two periods if it goes through an up-down sequence?

a. $32.72

b. $30.49

c. $29.42

d. $33.58

Answer 1

In a four-period binomial model, the stock price after two periods, following an up-down sequence, will be $30.49.

Step-by-step explanation:

To determine the stock price after two periods in a four-period binomial model, we need to consider the possible sequences of price movements. In this case, the sequence is up-down.

Starting with a stock price of $31, after the first period, it can either go up by 11% to $34.41 or down by 9.5% to $28.02. After the second period, if the stock goes up, it will be $34.41 * 1.11 = $38.18. If it goes down, it will be $28.02 * 0.905 = $25.38.

So, the stock price after two periods, following an up-down sequence, will be $25.38. Therefore, the correct answer is option b. $30.49.