king_kong

Diskopotato wrote:
Ok, for the exam I’ll use the magnitde of the up and down price movements on the underlying given in the problem.
Up move on stock 15%
Down move on stock 10%
So U=1.15 and D = 0.9 to caluclate the risk neutral probabilities. If I don’t get the right answer I’ll try it the other way…
Thanks for the responses
The reciprical method is only used when you are not given the down move.  If you are given a down move, then USE IT.  I’m guessing they would give us both.  One thing that you have to watch for is the time for the risk free rate,  on this one(or maybe a different one) I couldn’t come up with an answer because I didn’t adjust the risk free rate for being less than one period.