Suppose you want to price a three-month option using a tree with 100 steps. The underlying...

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Suppose you want to price a three-month option using a tree with 100 steps. The underlying stock has a volatility of 40%. Three month bonds with $100 faces are trading at $98.02. Then the up-move (u) and one-period discount rate (r) you would use when building your tree are closest to: u = 1.04 and r = 0.005% O u = 1.04 and r = 0.02% O u = 1.02 and r = 0.005% Ou = 1.02 and r = 0.02% Suppose you want to price a three-month option using a tree with 100 steps. The underlying stock has a volatility of 40%. Three month bonds with $100 faces are trading at $98.02. Then the up-move (u) and one-period discount rate (r) you would use when building your tree are closest to: u = 1.04 and r = 0.005% O u = 1.04 and r = 0.02% O u = 1.02 and r = 0.005% Ou = 1.02 and r = 0.02%

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Heres how to determine the closest upmove u and oneperiod discount rate r for your threemonth option ... View the full answer