Beatnik

Hi, Rina. The quick answer is that the up-factor and the down-factor can be whatever you want it to be. Let's say you are constructing a binomial tree to model the price of a bond. The expected future price of the bond is not equal to the current price. So, if the current price is S, p*U + (1-p)*D <> S. When constructing binomial trees, you are supposed to match the model inputs to the asset you are trying to model.

TLDR version: U and P can be any values, since zero drift is not always true.