Explanation:
Because the size of the up-move factor is 1.25, the size of the down-move factor is equal to: $1 / 1.25 = 0.8$.
The probability of the up move, given a dividend yield, , is computed as:
(Book 4, Module 60.2, LO 60.e)
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Question 41
The binomial option pricing model can be altered to value a stock that pays a continuous dividend yield. Assuming the size of the up-move factor in a binomial model is 1.25, the risk-free rate is 4%, and the dividend yield is equal to 2%, what is the probability of the up move for the first period of the binomial tree?
A
45%.
B
49%.
C
51%.
D
55%.
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