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
In the first period, the stock increased by 30%. In the second period the stock will increase by another 30%.