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PRMIA Exam 8007 Topic 1 Question 49 Discussion

Actual exam question for PRMIA's Mathematical Foundations of Risk Measurement ? 2015 Edition exam
Question #: 49
Topic #: 1
[All Mathematical Foundations of Risk Measurement ? 2015 Edition Questions]

In a 2-step binomial tree, at each step the underlying price can move up by a factor of u = 1.1 or down by a factor of d = 1/u. The continuously compounded risk free interest rate over each time step is 1% and there are no dividends paid on the underlying. Use the Cox, Ross, Rubinstein parameterization to find the risk neutral probability and hence find the value of a European put option with strike 102, given that the underlying price is currently 100.

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Suggested Answer: C


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