If the volatility of a stock is 20% per annum and a risk-free rate is 5% per annum, which of the following is closest to the cox, ross, rubinstein parameter p for a tree with a three-month time step?

a) 0.50
b) 0.54
c) 0.58
d) 0.62

B. 0,54

Explanation:

Step 1. Given information.

Step 2. Formulas needed to solve the exercise.

u = e volatiltiy * (time).5

a = e rate * time

p = (a - d)/ (u - d)

Step 3. Calculation.

u = e 0.2 * (.25).5  

u = 1.105170918

d = 1/u  

d = .904837418

a = e rate * time  

a = e 0.05 * .25  

a = 1.012578452

p = (a - d)/ (u - d)

p = (1.012578452 - 0.904837418)/ (1.105170918 - 0.904837418)

p = .538 = .54

Option B

two years ago, when picking flowers in the mountains back of yosemite valley, i found a book. it was blotted and storm-beaten; all of its outer pages were mealy and crumbly. the paper seemed to dissolve like the snow beneath which it had been buried, however; many of the inner pages were well preserved. and although all were more or less stained and torn, whole chapters were easily readable. this is the condition of the great open book of yosemite glaciers today; its granite pages have been torn and blurred by the same storms that wasted the castaway book.

two years ago, when picking flowers in the mountains back of yosemite valley; i found a book. it was blotted and storm-beaten, all of its outer pages were mealy and crumbly. the paper seemed to dissolve like the snow beneath which it had been buried, however, many of the inner pages were well preserved. and although all were more or less stained and torn; whole chapters were easily readable. this is the condition of the great open book of yosemite glaciers today, its granite pages have been torn and blurred by the same storms that wasted the castaway book.