Hi I need help with the following question: Suppose you are attempting to value

Question

Hi I need help with the following question:

Suppose you are attempting to value a 1-year maturity option on a stock with volatility (i.e.,annualized standard deviation) of 0.30.

What would be the appropriate values for u and d if your binomial model is set up using: (Do not round intermediate calculations. Round your answers to 4 decimal places.)

Thank you.

Suppose you are attempting to value a 1-year maturity option on a stock with volatility (i.e.,annualized standard deviation) of 0.30.

Explanation / Answer

Sub periods 1: u=e^(0.3*sqrt(1))=1.349859 ,d=e^(-0.3*sqrt(1))=0.740818

Sub periods 4: u=e^(0.3*sqrt(0.25))=1.161834 ,d=e^(-0.3*sqrt(0.25))=0.860708

Sub periods 12: u=e^(0.3*sqrt(0.0833))=1.090463 ,d=e^(-0.3*sqrt(0.0833))=0.917042

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