Binomial Tree

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Binomial Tree

Postby suresh.wadhwani2009 » Tue May 01, 2012 11:35 am

Pls explain:

Currently, shares of ABC Corp. trade at USD 100. The monthly risk neutral probability of the price increasing by USD 10 is 30%, and the probability of the price decreasing by USD 10 is 70%. What are the mean and standard deviation of the price after 2 months if price changes on consecutive months are independent?

Mean Standard Deviation
A. 70 11.32
B. 70 12.96
C. 92 11.32
D. 92 12.96

Source: qn from 2010 practice exam

Tags:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Binomial Tree

Postby content.pristine » Wed May 02, 2012 1:50 pm

Hi Suresh,

The answer here is D.
I've solved this question in an excel sheet.
You can access this at:
http://c719308.r8.cf2.rackcdn.com/Binomial%20Tree.xlsx

Hope this helps.. 8-)

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Binomial Tree

Postby suresh.wadhwani2009 » Wed May 02, 2012 3:16 pm

Thanks!


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