Determine the value of d for a four period binomial model when the option's life is one-fourth of a year and the volatility is 0.64.Use the model for u and d that does not require the risk-free rate.
A)0.85
B)1.17
C)2.56
D)0.90
E)none of the above

Question

Quizplus · Accepted Answer

The value of d in a binomial model is calculated as d = e^(-σ√Δt), where σ is the volatility and Δt is the time period. Here, Δt = 1/4 and σ = 0.64, so d = e^(-0.64√(1/4)) ≈ 0.85.

Determine the Value of D for a Four Period Binomial