View Full Version : risk neutral probability (ASM p 193)
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?
02-28-2007, 10:46 AM
Think about this ....
When you add those two together you get 1.
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?
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).
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)
02-28-2007, 11:37 AM
Refer to the replacement page at the end of the errata.
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