CFA Level I · CFA Level I Exam · Valuing a Derivative Using a One-Period Binomial Model
In a one-period binomial model for a non-dividend-paying stock, the underlying asset price at the end of the period is assumed to most likely:
In a one-period binomial model the underlying price can move to only one of two values at the end of the period, an up price or a down price. This simple two-state structure is what allows the derivative to be replicated and valued.
- Atake one of two possible valuesCorrect
- Bfollow a continuous distribution
- Cremain equal to its current value
Explanation
The one-period binomial model restricts the underlying to two outcomes, an up move or a down move. A continuous distribution is not used, and staying unchanged is not one of the two states.
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