- CFA Exams
- CFA Level I Exam
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 11. Binomial Valuation of Options

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**CFA Practice Question**

According to the binomial model, the value of a call option is NOT determined by ______.

B. the volatility of the underlying

C. the risk-free rate

A. the probabilities of the up and down moves

B. the volatility of the underlying

C. the risk-free rate

Correct Answer: A

The actual probabilities of up and down moves do not matter. The binomial model specifies two possible prices for the underlying asset one period later, and enables the construction of a risk-free hedge consisting of the option and the underlying.

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