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Test Bank: Chapter 18
Binomial Trees in Practice
1. An exchange rate has a volatility of 12%. The domestic and foreign risk-free
interest rates are both 4%, respectively. The time step on a binomial tree is three
months.
(i) What are the p , u and d parameters for a Cox, Ross, and Rubinstein tree?
Give four decimal places
u =_ _ _ _ _ _
d= ______
p=______
2. A stock price is initially $30 and u in the Cox-Ross-Rubinstein tree is 1.1. What
are the stock prices at the end of two time steps
_ _ _ _ _ _ and _ _ _ _ _ _ and _ _ _ _ _ _
3. Which of the following cannot be calculated directly from a binomial tree (Circle
two)
(a)
vega
(b)
delta
(c)
rho
(d)
gamma
(e)
theta
4. A binomial tree prices an American option at $3.12 and the corresponding
European option at $3.04. The Black-Scholes price of the European option is
$2.98. What is the control variate price of the American option?