{"id":45192,"date":"2024-04-15T21:54:32","date_gmt":"2024-04-15T21:54:32","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=45192"},"modified":"2024-04-15T21:54:32","modified_gmt":"2024-04-15T21:54:32","slug":"third-step-in-binomial-approach-of-option-pricing-is-to","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/third-step-in-binomial-approach-of-option-pricing-is-to\/","title":{"rendered":"Third step in binomial approach of option pricing is to"},"content":{"rendered":"<p>\r\n    <!-- Check if it's an AMP page -->\r\n            <!-- Non-AMP version -->\r\n        <div class=\"mcq-container\" data-quiz-id=\"quizState_6a973b4c0986e\">\r\n                                            <div class=\"option\" data-option-key=\"option1\" data-is-correct=\"false\">\r\n                    equalize beginning price                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option2\" data-is-correct=\"false\">\r\n                    equalize range of payoffs                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option3\" data-is-correct=\"true\">\r\n                    equalize domain of payoff                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option4\" data-is-correct=\"false\">\r\n                    equalize ending price                <\/div>\r\n                            \r\n            <!-- Feedback messages for non-AMP -->\r\n            <div class=\"feedback\" data-feedback=\"wrong\">Answer is Right!<\/div>\r\n            <div class=\"feedback\" data-feedback=\"right\">Answer is Wrong!<\/div>\r\n        <\/div>\r\n\r\n        <script>\r\n        document.addEventListener('DOMContentLoaded', function () {\r\n            var containers = document.querySelectorAll('.mcq-container');\r\n\r\n            containers.forEach(function(container) {\r\n                var options = container.querySelectorAll('.option');\r\n                var feedbackSelect = container.querySelector('[data-feedback=\"select\"]');\r\n                var feedbackWrong = container.querySelector('[data-feedback=\"wrong\"]');\r\n                var feedbackRight = container.querySelector('[data-feedback=\"right\"]');\r\n\r\n                options.forEach(function(option) {\r\n                    option.addEventListener('click', function() {\r\n                        var selectedOption = option.getAttribute('data-option-key');\r\n                        var isCorrect = option.getAttribute('data-is-correct') === 'true';\r\n\r\n                        \/\/ Remove previous selections\r\n                        options.forEach(function(opt) {\r\n                            opt.classList.remove('correct', 'incorrect');\r\n                        });\r\n\r\n                        \/\/ Add the correct\/incorrect class\r\n                        if (isCorrect) {\r\n                            option.classList.add('correct');\r\n                            feedbackRight.hidden = false;\r\n                            feedbackWrong.hidden = true;\r\n                        } else {\r\n                            option.classList.add('incorrect');\r\n                            feedbackRight.hidden = true;\r\n                            feedbackWrong.hidden = false;\r\n                        }\r\n\r\n                        \/\/ Hide select feedback\r\n                        feedbackSelect.hidden = true;\r\n                    });\r\n                });\r\n            });\r\n        });\r\n        <\/script>\r\n    \r\n    <!--more--><\/p>\n<p>The correct answer is: <strong>C. equalize domain of payoff<\/strong>.<\/p>\n<p>The binomial approach to option pricing is a method of pricing options that uses a tree-like structure to represent the possible outcomes of the underlying asset. The first step in the binomial approach is to create a tree with two branches for each node, one for each possible outcome of the underlying asset. The second step is to calculate the probability of each outcome. The third step is to calculate the payoff for each outcome. The fourth step is to calculate the expected payoff for each node. The fifth step is to calculate the option price by discounting the expected payoff back to the present value.<\/p>\n<p>The domain of a payoff function is the set of all possible values that the payoff can take on. In the binomial approach, the domain of the payoff function is the set of all possible prices of the underlying asset. The third step in the binomial approach is to equalize the domain of the <div class=\"youtube-subscribe-container\">\r\n        <a href=\"https:\/\/www.youtube.com\/channel\/UCNHT8lW-JmLC68rjBfZhdkg?sub_confirmation=1\" target=\"_blank\" class=\"youtube-subscribe-button\">\r\n            <span class=\"youtube-icon\">\r\n                <svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 576 512\">\r\n                    <path d=\"M549.7 124.1c-6.3-23.7-24.8-42.3-48.3-48.6C458.8 64 288 64 288 64S117.2 64 74.6 75.5c-23.5 6.3-42 24.9-48.3 48.6-11.4 42.9-11.4 132.3-11.4 132.3s0 89.4 11.4 132.3c6.3 23.7 24.8 41.5 48.3 47.8C117.2 448 288 448 288 448s170.8 0 213.4-11.5c23.5-6.3 42-24.2 48.3-47.8 11.4-42.9 11.4-132.3 11.4-132.3s0-89.4-11.4-132.3zm-317.5 213.5V175.2l142.7 81.2-142.7 81.2z\"\/>\r\n                <\/svg>\r\n            <\/span>\r\n            Subscribe on YouTube\r\n  <div class=\"telegram-channel-container\">\r\n        <a href=\"https:\/\/t.me\/pscnotes2025\" target=\"_blank\" class=\"telegram-channel-button\">\r\n            <span class=\"telegram-icon\">\r\n                <svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 496 512\">\r\n                    <path fill=\"white\" d=\"M248,8C111,8,0,119,0,256s111,248,248,248s248-111,248-248S385,8,248,8z M362,177L320,367c-3,14-10,18-20,14l-56-41l-27,26 c-3,3-5,5-10,5l4-63L323,196c5-5-1-7-8-3l-98,62l-42-13c-9-3-10-9,2-14l162-63C351,160,365,164,362,177z\"\/>\r\n                <\/svg>\r\n            <\/span>\r\n            Join Our Telegram Channel\r\n        <\/a>\r\n    <\/div>       <\/a>\r\n    <\/div> payoff function. This means that the payoff for each outcome must be calculated for the same set of possible prices of the underlying asset. This is done by calculating the payoff for each outcome at the midpoint of the price range for each node.<\/p>\n<p>The other options are incorrect because they do not represent the third step in the binomial approach. Option A is incorrect because the beginning price is not used in the binomial approach. Option B is incorrect because the range of payoffs is not used in the binomial approach. Option D is incorrect because the ending price is not used in the binomial approach.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Subscribe on YouTube<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v22.2 (Yoast SEO v23.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Third step in binomial approach of option pricing is to<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/exam.pscnotes.com\/mcq\/third-step-in-binomial-approach-of-option-pricing-is-to\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Third step in 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