Question

How many terminal payoffs are there in a 2-step binomial tree? A. 3 B. 4 C....

How many terminal payoffs are there in a 2-step binomial tree?

A.

3
B.

4
C.

6
D.

8
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Answer #1

A 2 step binominal model can be presented in this way. In binomial model, an asset price is expected to have only 2 states, that's why it is known as binomial model. These 2 states are either upmove or downmove.

Based on above tree, we can see that there are only 3 payoffs possible i.e.

1. Both Upmoves

2. One Upmove and One Downmove irrespective of their position

3. Both Downmoves

So, A is the correct answer here.

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