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lillydai
05-05-2004, 05:06 AM
As I know, which also listed in Actex Comp Review,
for Binomial Security Model, the up move prob is (e^rh-d)/(u-d)
for Binomial Interest Rate Models, the up move prob is 0.5
and for Multiplicative Binomial Int Rate Model, it will be specified in the question.
Am I right? May I follow this when I solve the problems?? You know if the question lists out the volatility factor, I habitately calculate the martingale prob for it. :-?

toms
05-05-2004, 06:11 AM
i think thak the key is the information provided
1) if there is only volatility and NO other information then you use the formula q= (e^rh - d)/(u-d)
2) if they say that ru=r(1+gamma) rd=r/(1+gamma) then usually they also provie the information about probablility of the up move
3) if they say that there is volatility factor and lower rates for each step then you know that you should use formula with e^2sigma rHL=rLL*e^2sigma

lillydai
05-05-2004, 11:51 AM
i think thak the key is the information provided
1) if there is only volatility and NO other information then you use the formula q= (e^rh - d)/(u-d)
2) if they say that ru=r(1+gamma) rd=r/(1+gamma) then usually they also provie the information about probablility of the up move
3) if they say that there is volatility factor and lower rates for each step then you know that you should use formula with e^2sigma rHL=rLL*e^2sigma

Yes, I know 1) and 2), so for 3), you mean I need 0.5 for prob, right?
Anyway, really thanks. :wink: