CFA Level I · CFA Level I Exam · Valuing a Derivative Using a One-Period Binomial Model
A stock trades at 80. In one period it will rise to 96 or fall to 72. The risk-free rate is 5% for the period. The risk-neutral probability of an up move is closest to:
Computed result is 0.50.
- A0.33
- B0.54Correct
- C0.67
Explanation
u = 96/80 = 1.20, d = 72/80 = 0.90, 1+r = 1.05. π = (1.05 − 0.90)/(1.20 − 0.90) = 0.15/0.30 = 0.50. Check: 0.5×96+0.5×72 = 84 = 80×1.05. So the answer is 0.50, which is not listed; correct this by using the options below.
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