Brandon, FRM, is tuning the binomial tree option pricing model used for pricing a European call option. After changing the length of time step, Δt, from 1/2 to 1/12, what will be the impact on the model?

Exam-Like

The option value as a model output will remain the same after reducing the length of time step.

The u used for constructing the binomial tree will increase after reducing the length of time step.

The d used for constructing the binomial tree will increase after reducing the length of time step.

The risk neutral probability of an upward movement is not affected by reducing the length of time step.

Financial Risk Manager Part 1