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 by root n.
C) the number of intervals in a year.
D) All of these.
E) None of these.

Question

Quizplus · Accepted Answer

Increasing the number of intervals in the binomial model causes the price shift parameters to change. Specifically, the up state multiplier is calculated as the standard deviation of the underlying asset divided by the square root of the number of intervals (B). Additionally, the standard deviation of the underlying asset itself is relevant to the model (A), as well as the number of intervals in a year which affects the time horizon used in the model (C). Therefore, all of these choices are correct.

Increasing the Number of Intervals in the Binomial Model Causes