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In the binomial option pricing model, the risk-neutral probability of an up move equals:
A(u − r)/(u − d) (within the standard regulatory framework)
B(d − R)/(u − R)
C(1 + r)/(u + d)
D(R − d)/(u − d) where R = e^{rT} or (1+r)
Answer & Solution
Correct answer: D. (R − d)/(u − d) where R = e^{rT} or (1+r)
1. Identify what the question asks: this concept maps to riskneutralprob (§7.1).
2. Apply the framework or formula relevant to the topic.
3. Eliminate distractors and arrive at the correct option (D).
_Source: ICAI BoS CA Final Paper 2, Ch 9 "Derivatives Analysis and Valuation"_
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