Increasing the number of intervals in the binomial model causes the price shift parameters to change.New estimates are related to:
A)the standard deviation of the underlying asset.
B)the up state multiplier equals the standard deviation divided root n.
C)the number of intervals in a year.
D)All of the above.
E)None of the above.

Question

Quizplus · Accepted Answer

Increasing the number of intervals in the binomial model affects the price shift parameters, such as the up and down state multipliers. As the number of intervals increases, the size of each price shift decreases, and the gap between the up and down states also narrows. This is related to the standard deviation of the underlying asset, which is the key input in the model. Moreover, the up state multiplier is equal to the standard deviation divided by the square root of the number of intervals in a year, which also changes with the number of intervals used. Therefore, all of the above choices are correct.

Increasing the Number of Intervals in the Binomial Model Causes