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YoungestEverFSA
02-28-2007, 10:40 AM
I thought the risk neutral formula for p* was:

(exp[(r-delta)h]-d)/(u-d) (from lesson 3)

but on p 193 it uses the numerator

u - exp[(r-delta)h] with the same denominator.

its not mathematically equivalent.

Why do I use a different formula here?

Colymbosathon ecplecticos
02-28-2007, 10:46 AM

When you add those two together you get 1.

Hmmmm.

YoungestEverFSA
02-28-2007, 11:08 AM
Sorry, I didn't get the hint.

Using the formula from chapter 3 I get .5209, whereas the book gets .4791.

I realise that the answer I get for P(u) is the one the new formula gets for P(d), and vice-versa, but how does that help me?

NoName
02-28-2007, 11:15 AM
You should be able to work out by general reasoning which formula is for P(d) and which is for P(u).

mord
02-28-2007, 11:22 AM
Can someone else help? Where have I gone wrong?

Is the formula in ch 3 different than p 193?

Aren't they both for P(u)?

Aren't the corculamstances fairly similar (risk neutrality etc)