Using the BOPM to analyze a call option on a monthly basis would result in a total number of possible year-end stock prices of
A) 12.
B) 2.
C) 24.
D) 13.

Question

Quizplus · Accepted Answer

The Binomial Options Pricing Model (BOPM) creates a binomial tree to represent the possible paths a stock price can take over time. For a monthly analysis over a year, there would be 12 periods (months). At each period, the stock price can either go up or down, leading to a new branch in the tree. By the end of the year, this process results in 13 possible stock prices, not 12, because the initial stock price counts as the first possibility, and then each month adds another possible final price based on the up or down movement.

Using the BOPM to Analyze a Call Option on a Monthly