PRMIA Exam 8007 Topic 1 Question 69 Discussion

Actual exam question for PRMIA's Mathematical Foundations of Risk Measurement ? 2015 Edition exam

Question #: 69
Topic #: 1

[All Mathematical Foundations of Risk Measurement ? 2015 Edition Questions]

In a binomial tree lattice, at each step the underlying price can move up by a factor of u = 1.1 or down by a factor of . The continuously compounded risk free interest rate over each time step is 1% and there are no dividends paid on the underlying. The risk neutral probability for an up move is:

A0.5290

B0.5292

C0.5286

D0.5288

Show Suggested Answer

Suggested Answer: D

by Penney at Apr 13, 2024, 01:58 AM

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Lelia

2 days ago

I think the risk neutral probability for an up move is around 0.53.

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German

24 days ago

Hmm, I'm not entirely convinced. Let me double-check the calculations. *scribbles on notepad* Ah, I see where the rounding error might come in. I think C is the correct answer.

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Aron

26 days ago

Okay, plugging in the values, we get (e^(0.01) - 1/1.1) / (1.1 - 1/1.1), which simplifies to 0.5292. So I think the answer is B.

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Broderick

27 days ago

Ah, I remember this from the lectures. The risk-neutral probability is calculated as (e^(rt) - d) / (u - d), where r is the risk-free rate, t is the time step, u is the up factor, and d is the down factor.

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An

28 days ago

I agree, the key is understanding the risk-neutral probability formula and applying it correctly. Let's go through the steps together and see if we can arrive at the right answer.

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Margot

1 months ago

Okay, let's think this through. We have the up and down factors, the risk-free rate, and the question is asking for the risk-neutral probability of an up move. This is going to require some formula manipulation to get the right answer.

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Ozell

1 months ago

Hmm, this is a tricky one. The binomial tree model is a core concept in options pricing, so I'm sure the exam writers are testing our understanding of the underlying assumptions and calculations.

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