How is volatility of underlying stock reflected in binomial

Reference no: EM13926156

1. Explain the differences between a recombining and non-recombining tree. Why is the former more desirable?

2. How is the volatility of the underlying stock reflected in the binomial model?

3. Why are the up and down parameters adjusted when the number of periods is extended? Recall that in introducing the binomial model, we illustrated one- and two-period examples, but we did not adjust the parameters. What is the difference in these two examples, and why did we adjust the parameters in one case and not in the other?

Reference no: EM13926156

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