CFA Level I · CFA Level I Exam · Valuing a Derivative Using a One-Period Binomial Model
A stock trades at 50. In a one-period binomial model the up factor is 1.20 and the down factor is the reciprocal of the up factor. The stock price in the down state is closest to:
The down-state price is about 41.67. The down factor is the reciprocal of 1.20, which is 0.8333, and multiplying by the current price of 50 gives 41.67. The 60.00 figure is the up-state price.
- A41.67Correct
- B45.00
- C60.00
Explanation
Down factor = 1/1.20 = 0.8333. Down price = 50 × 0.8333 = 41.67. The 45.00 figure wrongly uses 1 − 0.10, and 60.00 is the up price (50 × 1.20).
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