Keep the selected model explicit
The questions require an interior setup when both terminal states are possible. A model price is conditional on its state support. A separately assumed actual probability does not alter the contract’s supplied payoff amounts.
Explain why a conclusion follows
Check the grown current price against the interval. For expected amounts, name the weighting measure and the date. Do not replace an unresolved input or invalid weight with a convenient zero.
Try the questions
Current 100, factor 1.05 and states 130/110 produce what selected-model status?
- A.
Valid because the higher state exceeds the current price
- B.
Outside the required interior domain
- C.
Valid after clamping the weight to zero
Answer and explanation
Answer: B
Review the record rather than calling a modified endpoint weight its solution.
- A
The grown current 105 is still below the lower state 110.
- B
105 is not between 110 and 130.
- C
Clamping fails to preserve the original underlying price.
A call pays 30/0. Actual higher probability is 70%, while pricing weight is 50%. Which amount is the actual expected expiry payoff?
- A.
21
- B.
15
- C.
14.285714
Answer and explanation
Answer: A
Different weighting measures and dates identify different objects.
- A
0.7×30=21 under the actual assumption.
- B
This is the pricing-weighted expectation.
- C
This is a discounted model value in the supplied 5% example.
A strike-200 call pays zero at both supplied terminal states 130/80. What does zero model value establish?
- A.
Every real strike-200 call is worthless
- B.
The claim is inactive within this supplied state support
- C.
Missing states should be entered as zero
Answer and explanation
Answer: B
The conclusion belongs to the explicit two-state model.
- A
A broader state model could allow prices above strike.
- B
Both modeled payoffs are known zero.
- C
Unknown inputs are not known zero payoffs.