0 MilindguptaPro Asked: December 12, 20202020-12-12T16:32:41+05:30 2020-12-12T16:32:41+05:30In: Quants (CFA L1) binomial distribution in quantitative cfa level 1 0 Did not understand Share Sorry, you do not have permission to answer to this question. 1 Answer Oldest Best Answer Naman Kr Jain Intermediate 2020-12-12T17:13:44+05:30Added an answer on December 12, 2020 at 5:13 pm By one period Bernoli what they meant to say is the stock can either go up or down only one time. Up (Price = 105 as given 1.05 times the price) Stock price Down (Price = 97 as given 0.97 times the price) Assuming the probability of going up is P then the only option for the stock price is to do down. Hence its probability is (1-p). So the Future stock price = P*(Up price) + (1-P)*Down Price hence: 102 = P*(105) + (1-p)*97
By one period Bernoli what they meant to say is the stock can either go up or down only one time.
Up (Price = 105 as given 1.05 times the price)
Stock price
Down (Price = 97 as given 0.97 times the price)
Assuming the probability of going up is P then the only option for the stock price is to do down. Hence its probability is (1-p).
So the Future stock price = P*(Up price) + (1-P)*Down Price
hence: 102 = P*(105) + (1-p)*97