Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Calculate the risk neutral probability

Transcribed Image Text:Consider two 2-year options with a strike price of $52 on a stock whose current price is $50. The exhibits below show the binomial trees used to price the two options. There are two
steps of 1 year and in each step the stock either moves up by 20% or moves down by 20%. The risk-free rate is 5%.
Exhibit 3
72
60
50
1.4147
48
4.1923
4
40
9.4636
32
20
Exhibit 4
72
60
50
1.4147
48
5.0894
4
40
12.0
32
20
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