1. In the binomial option pricing model the:
A) value of u remains constant as the number of intervals increases.
B) result based on infinitesimally small intervals will differ significantly from the value developed by the Black Scholes model.
C) percentage increase in price in each interval can differ from the percentage decrease in price.
D) number of intervals required for convergence is quite large.
E) interval time span decreases as time moves forward.
2. Assume you are determining the risk-neutral probabilities of a price increase and decrease. In this situation, you know the expected return on the asset must equal the:
sponsoring firm’s cost of capital.
annual inflation rate.
risk-free rate.
CAPM rate of return.
market rate of return.