So=50. ST can take 2 values: 60 or 42. The risk free rate from time 0 to time T is 12% (this is not annualized). What is the risk-neutral probability for ST to go to 6O? (Keep 4 decimal places for your final answer).

So=50. ST can take 2 values: 60 or 42. The risk free rate from time 0 to time T is 12% (this is not annualized). What is the risk-neutral probability for ST to go to 6O? (Keep 4 decimal places for your final answer).

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 6BIC

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

So=50. ST can take 2 values: 60 or 42. The risk free rate from time 0 to time T is 12% (this is not annualized). What is the risk-neutral
probability for ST to go to 60? (Keep 4 decimal places for your final answer).
It is

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