Answer: 0.4275

## 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.

Author: LeetQuiz .