CoboCards App FAQ & Wishes Feedback
Language: English Language
Sign up for free  Login

This flashcard is just one of a free flashcard set. See all flashcards!

All main topics / Finance & Investment / Derivatives / Derivatives
202
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

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.

New comment
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015

Cancel
Email

Password

Login    

Forgot password?
Deutsch  English