L1.T4.1 Binomial Valuation Models

[choonho]

David,

In question 1.5, how does "the model will incorporate the index's dividend yield of 2.0% per annum" affect the calculation? It seems that the info was irrelevant in the Excel answer sheet.

 

[David Harper CFA FRM]

Hi choonho,

The source question has some discussion on this @ http://forum.bionicturtle.com/threads/p1-t4-1-one-and-two-step-binomial-valuation-models.4744/
(you posted in the upper, free boards, which is fine ... however, the lower boards contain the specific source Q&A & follow-up)

as noted by Ankur in the thread, the dividend yield of 2% is employed: it reduces (a) where (a) = exp(riskless rate - dividend yield)*T, and therefore influences (p). Thanks,