A stock is currently trading at $56 and we assume a three-period binomial tree model where each period the stock can either increase by 30%, or fall by 18%. Each step in the tree is 4 months. The interest rate is 1.1% per year (continuous compounding). In this model, what is the risk-neutral probability that the stock price will go up twice and drop once over the three periods? [Provide your answer as a percentage rounded to two decimals, i.e. 40.25 for 0.4025-40.25%]
A stock is currently trading at $56 and we assume a three-period binomial tree model where each period the stock can either increase by 30%, or fall by 18%. Each step in the tree is 4 months. The interest rate is 1.1% per year (continuous compounding). In this model, what is the risk-neutral probability that the stock price will go up twice and drop once over the three periods? [Provide your answer as a percentage rounded to two decimals, i.e. 40.25 for 0.4025-40.25%]
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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![A stock is currently trading at $56 and we assume a three-period binomial tree model
where each period the stock can either increase by 30%, or fall by 18%. Each step in
the tree is 4 months. The interest rate is 1.1% per year (continuous compounding). In
this model, what is the risk-neutral probability that the stock price will go up twice
and drop once over the three periods? [Provide your answer as a percentage rounded
to two decimals, i.e. 40.25 for 0.4025-40.25%]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F27484300-95da-42ce-b23a-39f1abbb6553%2Fa20a76cd-6378-475a-bf41-fd605851e3b0%2Fhu3rd7a_processed.jpeg&w=3840&q=75)
Transcribed Image Text:A stock is currently trading at $56 and we assume a three-period binomial tree model
where each period the stock can either increase by 30%, or fall by 18%. Each step in
the tree is 4 months. The interest rate is 1.1% per year (continuous compounding). In
this model, what is the risk-neutral probability that the stock price will go up twice
and drop once over the three periods? [Provide your answer as a percentage rounded
to two decimals, i.e. 40.25 for 0.4025-40.25%]
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