Schroder's (1988)approach to binomial option pricing offers a way of
A)Obtaining recombining trees by restating cash dividends as dividend yields.
B)Obtaining recombining binomial trees even when there are cash dividends.
C)Obtaining recombining trees when dividends are stated as yields but not when they are stated as cash amounts.
D)Pricing options efficiently using non-recombining binomial trees.

Question

Quizplus · Accepted Answer

Schroder's approach allows for the creation of recombining binomial trees even when cash dividends are present. This is achieved by adjusting the probabilities of up and down movements in the tree to incorporate the effect of the dividend payments. The approach also works when dividends are stated as yields or cash amounts.

Schroder's (1988)approach to Binomial Option Pricing Offers a Way of