For an option on futures, the volatility is 35%, the time step is three months, and the risk-free rate is 5%. What is the Cox, Ross, Rubinstein parameter, p?
A) 0.52
B) 0.46
C) 0.48
D) 0.50

Question

Quizplus · Accepted Answer

The Cox, Ross, Rubinstein parameter is calculated as h = e^(rT) where r is risk-free rate, T is time step and h is volatility. Therefore, h = e^(0.05*0.25) * 0.35 = 0.4604, which is approximately 0.46. The closest option to this value is choice B.

For an Option on Futures, the Volatility Is 35%, the Time