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 1 year ago

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