Homework Help is Here – Start Your Trial Now!
Math
Probability
Attaching Probabilities to Up and Down Nodes For Example 7.6, solve for the probability of the up state occurring that is consistent with expected appreciation of the underlying asset at the 4 per cent risk-free rate. (See Exhibit 7.9 for the numbers to use in this example.) Answer: With a 4 per cent risk-free rate per period in Example 7.6, the expected value of the CAC-40 in the next period if investors are risk neutral is 104 per cent of the current value, €4,460. Hence the risk-neutral probability a that makes the expected future value of the underlying asset 104 per cent of today's value solves €4,460(1.04) = €4.9067 + €4,014(1 – T)

Attaching Probabilities to Up and Down Nodes For Example 7.6, solve for the probability of the up state occurring that is consistent with expected appreciation of the underlying asset at the 4 per cent risk-free rate. (See Exhibit 7.9 for the numbers to use in this example.) Answer: With a 4 per cent risk-free rate per period in Example 7.6, the expected value of the CAC-40 in the next period if investors are risk neutral is 104 per cent of the current value, €4,460. Hence the risk-neutral probability a that makes the expected future value of the underlying asset 104 per cent of today's value solves €4,460(1.04) = €4.9067 + €4,014(1 – T)

A First Course in Probability (10th Edition)
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...
See similar textbooks
icon
Related questions
Question
100%

Hello

can you show how to derive the risk neutral probability(pi) equal to 0.70 by hand. Is it possible to do that a easy way 

Attaching Probabilities to Up and Down Nodes For Example 7.6, solve for the probability of the up state occurring that is consistent with expected appreciation of the underlying asset at the 4 per cent risk-free rate. (See Exhibit 7.9 for the numbers to use in this example.) Answer: With a 4 per cent risk-free rate per period in Example 7.6, the expected value of the CAC-40 in the next period if investors are risk neutral is 104 per cent of the current value, €4,460. Hence the risk-neutral probability a that makes the expected future value of the underlying asset 104 per cent of today's value solves €4,460(1.04) = €4.9067 + €4,014(1 – n) Thus r = 0.7.
Transcribed Image Text:Attaching Probabilities to Up and Down Nodes For Example 7.6, solve for the probability of the up state occurring that is consistent with expected appreciation of the underlying asset at the 4 per cent risk-free rate. (See Exhibit 7.9 for the numbers to use in this example.) Answer: With a 4 per cent risk-free rate per period in Example 7.6, the expected value of the CAC-40 in the next period if investors are risk neutral is 104 per cent of the current value, €4,460. Hence the risk-neutral probability a that makes the expected future value of the underlying asset 104 per cent of today's value solves €4,460(1.04) = €4.9067 + €4,014(1 – n) Thus r = 0.7.
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer