2088%IS THE BINOMIAL TREE USING THE 20% VOLATILITY ASSUMPTION CALIBR...

6.2088%

Is the binomial tree using the 20% volatility assumption calibrated properly?

A)

The tree is calibrated properly.

B)

The tree is not calibrated properly because adjacent nodes are not appropriate

standard deviations apart.

C)

The tree is not calibrated properly because it is not consistent with market prices.

Explanation

The tree is not calibrated properly - it does not value 3-year 7% bond at par (i.e., the market price):

V

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