Question
In: Finance
A stock price is currently $20. It is known that in three months it will go...
A stock price is currently $20. It is known that in three months it will go up to 22 or down to 18. The risk-free interest rate is 6% per annum with continuous compounding. What is p (the
risk-neutral probability of an up movement)
Solutions
Expert Solution
| Risk free rate = e^rt | |||
| =2.7183^(0.06*3/12) | |||
| =2.7183^0.015 | |||
| =1.015113 | |||
| p = | Probability | ||
| r= | risk free rate | 1.015113 | |
| d = | =down price/current price | 0.900 | |
| u = | =up price / current price | 1.100 | |
| p= r-d/u-d | |||
| =1.0151-0.9/1.1-0.9 | |||
| =0.5756 or 0.58 |
jeff jeffy answered 2 years agoRelated Solutions
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