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PRMIA Exam 8007 Topic 1 Question 75 Discussion

Actual exam question for PRMIA's 8007 exam

Question #: 75
Topic #: 1

[All 8007 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 Larae at Jun 21, 2024, 11:00 PM

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Annice

5 months ago

This is a classic binomial tree problem. I could do these in my sleep. Hey, does anyone else feel like a tree right now? No? Just me? Alright then.

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Kimi

6 months ago

Okay, let me break this down step-by-step. The up-factor is 1.1, the down-factor is 0.9091, and the risk-free rate is 1%. Yep, B is the correct answer!

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Jacqueline

4 months ago

I'm pretty confident it's B) 0.5292. The risk neutral probability for an up move should be slightly higher.

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Lera

4 months ago

Actually, I believe it's C) 0.5286. The calculations seem to point in that direction.

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Mollie

4 months ago

Are you sure about that? I think the answer is A) 0.5290

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Sherita

4 months ago

I agree with you, B) 0.5292 seems to be the correct answer. The risk neutral probability is an important concept in option pricing.

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Essie

5 months ago

Actually, I believe it's C) 0.5286. The risk neutral probability is calculated using the risk-free rate and the up and down factors.

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Melvin

5 months ago

Are you sure about that? I think the answer is A) 0.5290.

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Evelynn

6 months ago

Wait, isn't the risk-neutral probability supposed to be between 0 and 1? I'm not sure any of these answers fit that criteria.

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Rozella

5 months ago

It seems like the risk-neutral probability for an up move is 0.5290, which is the closest to 0.5.

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Melissa

5 months ago

The risk-neutral probability is calculated based on the risk-free interest rate and the up and down factors in the binomial tree model.

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Felix

5 months ago

D) 0.5288

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Richelle

5 months ago

C) 0.5286

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King

5 months ago

B) 0.5292

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Ettie

5 months ago

A) 0.5290

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Holley

6 months ago

Hmm, this question seems tricky. I think I'll go with option B, it looks the most plausible to me.

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Annamae

5 months ago

Let's go with option B then.

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Helga

5 months ago

I agree, option B looks like the most plausible answer.

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Mona

5 months ago

I'm not sure, but option B does seem like a good choice.

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Dalene

6 months ago

I think the answer is option B.

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Chandra

6 months ago

Sure, I used the formula for risk neutral probability and plugged in the values given in the question. That's how I arrived at 0.5292.

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Novella

6 months ago

Hmm, that's interesting. Can you explain your rationale?

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Chandra

6 months ago

I believe it's actually 0.5292, based on the calculations I did.

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Novella

7 months ago

I think the risk neutral probability for an up move is 0.5290.

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