Why is a multiperiod binomial model a better approximation

Reference no: EM131458083

Question: Why is a multiperiod binomial model a better approximation to the actual stock price process than the single period binomial model?

- A stock's price S is $100. After three months, it either goes up and gets multiplied by the up factor U = 1.163287, or it goes down and gets multiplied by the down factor D = 0.861785.

- Options mature after T = 0.5 years and have a strike price K = $110.

- A dollar invested in the money market account grows to R = $1.012578 after three months.

The stock price tree is:

2211_Stock 2.png

Reference no: EM131458083

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