- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 10. Valuing a Derivative Using a One-Period Binomial Model
- Subject 1. Binomial Valuation of Options
CFA Practice Question
What is the most likely impact of an increase in the risk-free rate on the risk-neutral upside probability in a binomial model?
B. Increase in probability
C. Decrease in probability
A. No impact
B. Increase in probability
C. Decrease in probability
Correct Answer: B
The upside risk-neutral probability = (1+r-D)/(U-D). Therefore, an increase in risk-free rate will increase the upside risk-neutral probability.
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