CFA Level I · CFA Level I Exam · Valuing a Derivative Using a One-Period Binomial Model
Compared with valuing a one-period option using a replicating portfolio, valuing it with risk-neutral probabilities most likely:
Risk-neutral valuation gives the same value as the replicating portfolio approach. Both rest on no-arbitrage pricing, and the risk-neutral probability is computed from the up and down factors and the risk-free rate, so no estimate of risk aversion or real-world probabilities is needed.
- Agives the same valueCorrect
- Brequires estimating investors' risk aversion
- Cdepends on the real-world probability of an up move
Explanation
Both approaches rely on no-arbitrage pricing and produce identical values. Risk-neutral probabilities are derived from the up and down factors and the risk-free rate, so neither risk aversion nor real-world probabilities are needed.
Did you get it right without looking?
One question tells you little. A timed set on Valuing a Derivative Using a One-Period Binomial Model shows your real accuracy, how long you take and where you lose marks.
More Valuing a Derivative Using a One-Period Binomial Model questions
- A stock trades at 50. Over one period it can rise to 60 (u = 1.20) or fall to 40 (d = 0.80). The risk-free rate is 5% per period. The risk-n…
- Compared with pricing an option using real-world probabilities of up and down moves, the risk-neutral approach in a one-period binomial mode…
- In a one-period binomial model, the risk-neutral probability of an up move is most likely interpreted as:
- In a one-period binomial model for pricing a European call, the risk-neutral probability of an up move is most likely interpreted as:
- In a one-period binomial model, an analyst builds a portfolio of the underlying asset and a risk-free bond that reproduces the payoffs of a …
- Which of the following conditions is most likely required for the one-period binomial model to give a valid no-arbitrage derivative value?