Explanation

The risk-neutral probability of an upward move in a binomial tree is calculated using the formula:

$p = \frac{e^{(r - q)\Delta t} - d}{u - d}$

Where:

• $r = 0.85\% = 0.0085$ (risk-free rate)
• $q = 2.92\% = 0.0292$ (dividend yield)
• $u = 1.1850$ (upward move factor)
• $d = 0.8439$ (downward move factor)
• $\Delta t = 0.5$ (since it's a two-step tree for 1 year, each step is 6 months)

Step-by-step calculation:

1. Calculate $(r - q)\Delta t = (0.0085 - 0.0292) \times 0.5 = -0.0207 \times 0.5 = -0.01035$

2. Calculate $e^{(r - q)\Delta t} = e^{-0.01035} \approx 0.9897$

3. Calculate numerator: $0.9897 - 0.8439 = 0.1458$

4. Calculate denominator: $1.1850 - 0.8439 = 0.3411$

5. Calculate probability: $p = \frac{0.1458}{0.3411} \approx 0.4275$

Therefore, the risk-neutral probability of an upward move is approximately 0.4275, which corresponds to option A.