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Question
In the event tree used in the binomial approach to option valuation, at each node the value either increases or decreases by the proportion u or d, respectively. If the annualized volatility of the underlying asset’s value is 10 percent per year and the horizon is six months, what are the up-movement u and down-movement d values?
a) 1.0488 and 0.9534
b) 1.0513 and 0.9511
c) 1.0733 and 0.9317
d) 1.2505 and 0.8000
Answer
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