With the binominal option pricing model,it is reasonable to assume:
A)there is a varying rate of price change from one time interval to the next time interval.
B)any new information impacting prices is similar from one interval to another interval.
C)the discount rate increases with each time interval.
D)the call price will only be usable if the time interval is extremely small.
E)that each project is limited to two outcomes over its life.

Question

Quizplus · Accepted Answer

The binominal option pricing model assumes that any new information impacting prices is similar from one interval to another interval, making it a reasonable assumption. The model uses a tree diagram to show the different possible outcomes of an investment, assuming that each period will experience one of two prices. The discount rate and the rate of price change are assumed to be constant throughout the life of the investment. The call price can be computed for any time interval, not just extremely small ones. The model is used for a wide range of projects and investments with more than two possible outcomes.

With the Binominal Option Pricing Model,it Is Reasonable to Assume