CFA Level I · CFA Level I Exam · Valuing a Derivative Using a One-Period Binomial Model
In a one-period binomial model, the price of the underlying asset at the end of the period is assumed to be best described as:
In a one-period binomial model the underlying can take only one of two values at the end of the period, an up price or a down price. It does not follow a continuous distribution and has no unchanged state.
- Aone of two possible values, an up value or a down valueCorrect
- Bany value on a continuous distribution around the current price
- Cone of three possible values: up, unchanged or down
Explanation
The one-period binomial model restricts the underlying to exactly two outcomes at expiration, an up move or a down move. A continuous distribution or a three-outcome tree is not the structure of this model.
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