What are the values of u,the up state multiplier,and d,the down state multiplier,if there are monthly intervals and the standard deviation is .38?
A)1.1159; .8961
B).0317; 1.0327
C).0317; .9683
D).2193; .7807
E)1.1159; −.1159

Question

Quizplus · Accepted Answer

The values of u and d can be calculated using the formulae for the Cox-Ross-Rubinstein model in a binomial options pricing model. Given a standard deviation (σ) of .38 for monthly intervals, u and d can be calculated as follows: u = e^(σ√Δt) and d = 1/u, where Δt = 1/12 for monthly intervals. Plugging in the values, we find that u = 1.1159 and d = .8961, which matches option A.

What Are the Values of U,the Up State Multiplier,and D,the