Binomial Model

ameyakukde
Good Student
Posts: 29
Joined: Thu Aug 02, 2012 11:55 am

Binomial Model

Postby ameyakukde » Sun Apr 07, 2013 12:36 am

Suppose risk-free rate of interest is 5%, volatility of the stock price is 35% and each step of the binomial model is 0.1 years, what is the probability of up-movement at each step of the binomial model?

vnraghuveer
Good Student
Posts: 20
Joined: Mon Apr 08, 2013 1:36 pm

Binomial Model

Postby vnraghuveer » Mon Apr 08, 2013 3:09 pm

Volatility for a period of 0.1 years can be calculated by multiplying annual volatilty with square root of 0.1. therefore here it comes out to be 35*sqrt(.1) = 11.07
uptick, u = 1.1107
downtick, d = 1/uptick =0.9
now the required probability = (1+Rf)^0.1-d)/(u-d) = 0.498


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