Answer: Decrease.

The risk-neutral probability (π) is a computed probability used in binomial option pricing, where the discounted weighted sum of expected values of the underlying asset (S₀) equals the current option price. This probability is derived using the risk-free rate (r) and the assumed up (Rᵤ) and down (R_d) gross returns of the underlying, as follows: π = (1 + r - R_d) / (Rᵤ - R_d). If the up gross return (Rᵤ) increases in a one-period binomial model, the denominator (Rᵤ - R_d) will increase. Consequently, the risk-neutral probability of an upward price movement (π) will decrease. Therefore, option A is correct, while options B and C are incorrect.

Author: LeetQuiz Editorial Team