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Consider a Two-Period Binomial Tree Setting in Which the Up U>1\mathcal { U } > 1

Question 16

Multiple Choice

Consider a two-period binomial tree setting in which the up and down moves are given,respectively,by U>1\mathcal { U } > 1 and d<1d < 1 .The risk-free gross rate of interest per time step is RR .Suppose there is a dividend D>0D > 0 paid after the first period of the tree. Let C1C _ { 1 } denote the value of a one-period call that is initially at-the-money.Let C2A,C2EC _ { 2 } ^ { A } , C _ { 2 } ^ { E } denote the values of two-period American and European calls,respectively,that too are initially at-the-money.
Which of the following statements is always true regardless of the specific parameter values?


A) C2A>C2F>C1C _ { 2 } ^ { A } > C _ { 2 } ^ { F } > C _ { 1 }
)
B) C2SC1C _ { 2 } ^ { S } \geq C _ { 1 }
)
C) C2AC1C _ { 2 } ^ { A } \geq C _ { 1 }
)
D) C2A>C1>C2FC _ { 2 } ^ { A } > C _ { 1 } > C _ { 2 } ^ { F }
)

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