PM MOCK Lawrence - Derivatives - Risk free rate

CFA Level II
#1

The question asks for a 60day call option value using the binomial tree.

The problem is that they only give in the data : Risk-free = 3%.

In the calculation of the risk-free probabilities, I used Pi(u) = (1+r-d)/(u-d) with r = 0,03

Guess what ? I was supposed to use : 0,03^(60/365) !

I understand that we must use the one period rate, but in this case there was no indication. Should we assume the rate given is always 1 year ? In the EOCs it is not the case (at least they give more precisions)

#2

Interest rates are always − _ always! _ − quoted as annual rates.

#3

You’re right. In the only other assessment (Moyle), they said “30days risk-free rate”.

I will add this on my fridge

#4

You have a really nice fridge

#5

Thanks ! It’s empty inside though these days lol

#6

CFA material is food for your soul wink

Is there a market for a fridge that only open if you answer right a qbank question ? devil