Question

suppose that we have a stock with a price of $52. we want to price a call option using the binomial model that has a strike price of $59. we are going to use steps of 5 days and price it for 20 days, so today plus four more time steps. the stock has a volatility of 55% and the risk free rate is 4%. what is our up multiplier? a. .9887 b. 1.011 c. 1.047 d. 1.066

Answer 1

The up multiplier in the binomial model can be calculated using the formula Up Multiplier = e^(Volatility * Square Root of Time Step). In this case, the up multiplier is approximately 1.047. Therefore, the correct option is c. 1.047.

Step-by-step explanation:

In the binomial model, the up multiplier can be calculated using the formula:

Up Multiplier = e^(Volatility * Square Root of Time Step)

In this case, the volatility is 55% and the time step is 5 days. Therefore, the up multiplier can be calculated as:

Up Multiplier = e^(0.55 * sqrt(5))

Using the calculator, the up multiplier is approximately 1.047.