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Basic Question 2 of 4
Assume in a 2-period binomial interest rate tree, the two nodes to the right of N are NH and NL, and the two nodes to the right of NH are NHH and NHL, and the two nodes to the right of NL are NLH and NLL. The backward induction methodology says to determine the value at NH, we need to know the values at:
B. NHH and NHL
C. NLH and NLL
A. NL and N
B. NHH and NHL
C. NLH and NLL
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I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
describe the process of calibrating a binomial interest rate tree to match a specific term structure;
describe the backward induction valuation methodology and calculate the value of a fixed-income instrument given its cash flow at each node;
compare pricing using the zero-coupon yield curve with pricing using an arbitrage-free binomial lattice;
CFA® 2024 Level II Curriculum, Volume 4, Module 29.