标题: 10% increase and 10% decrease in the price equals oringinal price [打印本页] 作者: sharksfan 时间: 2011-7-11 19:54 标题: 10% increase and 10% decrease in the price equals oringinal price
hi
in the probability distribuitions they are saying that a 10% increase and a 10% decrease would bring the price to the initial level. how is that possible. for example
initial price = 50$
10% increase = (100+10)*50/100 = 55
now the new price = 55
at this point a 10% decrease is 10% of 55 = 5.5 and so the new price = 49.5
similarly if we do the 10% decrease first and then do a 10% increase on the new price then we get the same 49.5 again.
but the book says 1.1*50/1.1 = 50
why would a 10 percent decrease use division when in fact it should be
there is no way i can see how 90/100 would equal 1/1.1 (which ignores a good rounding error) and then bring the final value to 50 instead of 49.5
this is really killing me. i would sincerely appreciate a quick and compelling response.
thanks
kiran作者: homie 时间: 2011-7-11 19:54
ravali your calcs assume that the option holder has committed to the position. But these are all valuations where you are assessing the probability of a price rise vs price drop.
For ex if price of gas shot up 5% on a $2 today and would drop the next day by 5%, my today's and next day's prices would be $2.10 and $1.99 resp.
OTH, if I think the prob of the %5 rise in gas price today is 60% and the 5% drop is 40%, the expected price of gas for tomorrow would be .6*2*1.05[1.26]+.4*2/1.05[.76]=2.02.
