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onceandforall
04-11-2007, 11:25 PM
Is the .5 probability in Ho-Lee and BDT binomial lattice model some kind of assumptions? But in risk neutral binomial lattice model we have to calculate the risk neutral probability. Right?

campbell
04-12-2007, 10:25 AM
The 0.5 probability binomial model changes the possible outcomes to get the risk-neutral result.

When building binomial trees to do risk-neutral pricing, you can set the up & down amounts and then solve for risk-neutral probability; you can set the probability, and solve for the up & down amounts; or you can do something in between. Usually, one or the other is easier to implement, which is why either is okay.

hershey220
04-12-2007, 11:30 AM
This topic was on 8v, but I think is just "background only" for APM (correct me if I'm wrong). It's a pretty easy topic, so I review it every once and a while, just in case, but I wouldn't spend too long on it.