PLEASE ANSWER ALL QUESTIONS!

QUestion 1

An analyst needs to construct a binomial tree to value an option on an index currently worth $4,012 and has a volatility of 19.625%. The index provides a dividend yield of 3.125%. Another analyst will develop a binomial tree to value an option on a non-dividend-paying stock currently worth $133, with a volatility of 17.5%. Which of the following is true?

Here p is the risk-neutral probability of an up move, and u and d are the up and down factors.

	a	The parameters p and u are the same for both trees.
	b	The parameter p is the same for both trees but u is not.
	c	The parameter u is the same for both trees but p is not.

QUESTION 2

Calculate a binomial model's up and down factors given a stock's annual volatility of 20% and the risk-free interest rate of 3.0%. The analyst will use the factors to price an option that expires in six months.

	a	1.15 and 0.87
	b	1.20 and 0.80
	c	0.9704 and 0.033