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2.The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk-neutral probability of that the stock price will be $36?

A.0.6

B.0.5

C.0.4

D.0.3

A.0.6

B.0.5

C.0.4

D.0.3

Answer: C

The formula for the risk-neutral probability of an up movement is

In this case u=36/30 or 1.2 and d=26/30 =0.8667. Also r=0 and T=0.5. The formula gives

p=(1-0.8667/(1.2-0.8667) =0.4.

The formula for the risk-neutral probability of an up movement is

In this case u=36/30 or 1.2 and d=26/30 =0.8667. Also r=0 and T=0.5. The formula gives

p=(1-0.8667/(1.2-0.8667) =0.4.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015