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This question calculates the lowest node price in a two-step binomial tree: Given: - Initial stock price S(0) = $30 - Volatility (σ) = 22% - Time step (Δt) = 1 Calculations: - d = e^(-σ√Δt) = e^(-22%×√1) = 0.8025 - Lowest node = S(0) × d × d = $30 × 0.8025 × 0.8025 = $19.321 The correct answer is B based on the solution provided.
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A two-step binomial has six nodes; the lower price occurs at S(0)×d×d, in the lower right.
d = e^(-σ√Δt) = e^(-22%×√1) = 0.8025;
The lowest node = $30 × d × d = $19.321.
A
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B
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C
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D
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E
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F
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