In a one-period binomial model, the value of an option is best described as the present value of:
A. a probability-weighted average of two possible outcomes.
B.a probability-weighted average of a chosen number of possible outcomes.
C. one of two possible outcomes based on a chosen size of increase or decrease
A should be the answer because whenever you are using binomial model, particularly risk neutrality approach you only make use of two pseudo(false) probabilities to value an option.
If you look at your notes or sir’s explanation, the possible outcome cannot be chosen because the probability is not actual and not based on our opinion which is why B is wrong and also C – hope it helps
The correct answer is A.
In a one-period binomial model, the value of an option is best described as the present value of a probability-weighted average of two possible outcomes. This is because the model assumes two possible future states, and the option’s value is calculated as a weighted average of the payoffs in these two states, discounted to their present value.
C might be the correct answer because we do not consider probability while using one period binomial model.
Please let me know if answer is correct or not
No ,A is the correct ans given.I wanted the reason behind that option
C- may be right answer because in binomial model we not do not use probability instead of that we use pseudo probability
Bhai language kaafi khrab hai is question mein options ki.
Option A ki bhi thori galat hai.
But mai solve krta to baaki dono options ko eliminate krdeta.
I hope I made sense 🙂
B aur C ko eliminate karna hai ki nhi ye kese pata karenge?