Hull:Options,Futures,andotherDerivatives,NinthEditionChapter21:BasicNumericalProceduresMultipleChoiceTestBank:QuestionswithAnswers1.HowmanynodesarethereattheendofaCox-Ross-Rubinsteinfive-stepbinomialtree?A.4B.5C.6D.7Answer:CThenumberofnodesattheendofonetimestepis2;thenumberofnodesattheendoftwotimestepsis3;andsoon.2.Whichofthefollowingcannotbeestimatedfromasinglebinomialtree?A.deltaB.gammaC.thetaD.vegaAnswer:DTocalculatevegaitisnecessarytoincreasevolatilityslightlyandconstructanewtree.Theotherthreecanbeestimatedfromasingletree.3.WhichofthefollowingistrueforuinaCox-Ross-Rubinsteinbinomialtree?A.ItdependsontheinterestrateandthevolatilityB.ItdependsonthevolatilitybutnottheinterestrateC.ItdependsontheinterestratebutnotthevolatilityD.ItdependsonneithertheinterestratenorthevolatilityAnswer:BItthereforedependsonvolatilitybutnottheinterestrate.4.HowmanydifferentpathsaretherethroughaCox-Ross-Rubinsteintreewithfour-steps?A.5B.9C.12D.16Answer:DTherearetwochoicesforthepathchosenattheinitialnode,twochoicesatthenodereachedattheendofthefirsttimestep,andsoon.Thetotalnumberofpathsis24=16.5.Whenwemovefromassumingnodividendstoassumingaconstantdividendyield,whichofthefollowingistrueforaCox,Ross,Rubinsteintree?A.TheparametersuandpchangeB.pchangesbutudoesnotC.uchangesbutpdoesnotD.NeitherpnoruchangesAnswer:BTheformulaforudoesnotchangebuttheformulaforpdoeschange.6.Whenthestockpriceis20andthepresentvalueofdividendsis2,whichofthefollowingistherecommendedwayofconstructingatree?A.Drawatreeforaninitialstockpriceof20andsubtractthepresentvalueoffuturedividendsateachnodeB.Drawatreeforaninitialstockpriceof22andsubtractthepresentvalueoffuturedividendsateachnodeC.Drawatreewithaninitialstockpriceof18andaddthepresentvalueoffuturedividendsateachnodeD.Drawatreewithaninitialstockpriceof18andadd2ateachnodeAnswer:CWefirstsubtractthepresentvalueofdividendsfromtheinitialstockprice.Wethendrawthetreeandthenaddbackthepresentvalueoffuturedividendsateachnode7.Whatistherecommendedwayofmakinginterestratesafunction...
