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Question 1

Multiple Choice

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Under the CFA Institute Code of Ethics and Standards of Professional Conduct, when applying the binomial option pricing model, an analyst must:

disclose that real-world probabilities directly affect the model’s output.

adjust the model’s output based on the investor’s subjective market expectations.

ensure clients understand that risk-neutral probabilities are used to derive fair value.

Explanation

The binomial model values options using risk-neutral probabilities, which are constructed to reflect a no-arbitrage environment—not real-world likelihoods. Analysts must clearly explain this distinction when communicating valuation results to clients, as part of their duty to communicate effectively, fairly, and accurately under the CFA Code and Standards. Misrepresenting or failing to clarify this can lead to misunderstandings about the model’s assumptions and outputs.

Question 2

Multiple Choice

Confidence Level

Low Medium High Mastered

Valuing A Derivative Using A One Period Binomial Model

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Question 1

Under the CFA Institute Code of Ethics and Standards of Professional Conduct, when applying the binomial option pricing model, an analyst must:

Explanation

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Question 2

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Valuing A Derivative Using A One Period Binomial Model

Test Options

Reset All Confidence Levels

Creating Copy

Question 1

Under the CFA Institute Code of Ethics and Standards of Professional Conduct, when applying the binomial option pricing model, an analyst must:

Explanation

Tags

Question 2

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