Calculate the risk neutral probability Consider two 2-year options with a strike price of $52 on a stock whose current price is $50. The exhibits below show the binomial trees used to price the two options. There are twosteps of 1 year and in each step the stock either moves up by 20% or moves down by 20%. The risk-free rate is 5%.Exhibit 37260501.4147484.19234409.46363220Exhibit 47260501.4147485.089444012.03220

Risk neutral probability = (er*Δt - d)/(u-d) r is risk free rate. Δt is time period between each…

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Calculate the risk neutral probability

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 1P

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Question

Calculate the risk neutral probability

Consider two 2-year options with a strike price of $52 on a stock whose current price is $50. The exhibits below show the binomial trees used to price the two options. There are two
steps of 1 year and in each step the stock either moves up by 20% or moves down by 20%. The risk-free rate is 5%.
Exhibit 3
72
60
50
1.4147
48
4.1923
4
40
9.4636
32
20
Exhibit 4
72
60
50
1.4147
48
5.0894
4
40
12.0
32
20

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