FINC 306 FINAL Exam 2026|2027 Advanced Practice Questions and
Answers with Complete A+ Solutions 100% Correct!!!
Binomial Distribution - Correct Answer -the asset price in each period can move up or down by specified
amount
Binomial option pricing - Correct Answer -enables us to determine the price of an option given the
characteristics of the stock or other underlying asset. It assumes that the price of the underlying asset
follows a binomial distribution.
two alternative binomial tree models - Correct Answer -Jarrow and Rude (1963) and Cox-Ross Rubinstein
(1979)
Recombining tree - Correct Answer -when an up move by the stock followed by a down move generate the
same stock price as a down move followed by an up move
Early exerceise - Correct Answer -makes no difference, at every node prior to expiration the option price
is greater than S-K hence we would not exercise even if the option had been American
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, Multiple binomial periods - Correct Answer -dividing the time to expiration into more periods allows us to
generate a more realistic tree with a larger number of different values at expiration
Valuation of American options in binomial tree - Correct Answer -at each node, we check for early
exercise. IF the value of the option is greater when exercise we assign that value to the node. Otherwise
we assign the value of the option unexercised. We work backwards as usual
Log normality and the binomial model - Correct Answer -the binomial tree approximates a lognormal
distribution, which is commonly used to model stock prices. The lognormal distribution is the probability
distribution that arises from the assumption that continuously compounded returns on the stock are
normally distributed
standard normal distribution - Correct Answer -A normal distribution with a mean of 0 and a standard
deviation (variance) of 1.
Black Scholes Model - Correct Answer -approaching an option pricing problem by modelling a stock price
as a log-normal distribution
Derivative - Correct Answer -A financial instrument that has a value determined by the price of the
underlying. An agreement between two parties
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Answers with Complete A+ Solutions 100% Correct!!!
Binomial Distribution - Correct Answer -the asset price in each period can move up or down by specified
amount
Binomial option pricing - Correct Answer -enables us to determine the price of an option given the
characteristics of the stock or other underlying asset. It assumes that the price of the underlying asset
follows a binomial distribution.
two alternative binomial tree models - Correct Answer -Jarrow and Rude (1963) and Cox-Ross Rubinstein
(1979)
Recombining tree - Correct Answer -when an up move by the stock followed by a down move generate the
same stock price as a down move followed by an up move
Early exerceise - Correct Answer -makes no difference, at every node prior to expiration the option price
is greater than S-K hence we would not exercise even if the option had been American
1|Page
, Multiple binomial periods - Correct Answer -dividing the time to expiration into more periods allows us to
generate a more realistic tree with a larger number of different values at expiration
Valuation of American options in binomial tree - Correct Answer -at each node, we check for early
exercise. IF the value of the option is greater when exercise we assign that value to the node. Otherwise
we assign the value of the option unexercised. We work backwards as usual
Log normality and the binomial model - Correct Answer -the binomial tree approximates a lognormal
distribution, which is commonly used to model stock prices. The lognormal distribution is the probability
distribution that arises from the assumption that continuously compounded returns on the stock are
normally distributed
standard normal distribution - Correct Answer -A normal distribution with a mean of 0 and a standard
deviation (variance) of 1.
Black Scholes Model - Correct Answer -approaching an option pricing problem by modelling a stock price
as a log-normal distribution
Derivative - Correct Answer -A financial instrument that has a value determined by the price of the
underlying. An agreement between two parties
2|Page
