Chapter 03 · Section 3.1

Binomial Pricing Question 4

Again let us use the preceeding example, but this time observe it across 3 periods. Stock XYZ costs 110. The stock can increase in value (upward multiplication factor: 1.3=143/110) or decrease in value (downward multiplication factor: 0.9=99/110).

Consider these multiplication factors and assume that the stock increases for a second time. What will be the value of stock XYZ at the end of the second period?

a) -99999/0
b) -128.70
c) -89.10
d) -0/185.89
e) -185.91/99999
• f) +185.90
  Yes. In the hypothesis which follows an upward multiplication factor of 1.3, for two successive increases, the stock takes on a value of 185.90. This corresponds to : 110 x 1.3 x 1.3 = 185.90. Continue

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