Hi everyone - for question 49 and 51 in Kaplan Mock Exam 2 Morning Session that asks about binomial pricing. The item set does not include a down effect on the price of a stock. In other words, it states the up factor is 1.15 but does not state the down factor. The answer gives .87 but I am not sure how this was calculated. Am I missing something? Thank you in advance!
they have used 1/1.15 = 0.87 (two decimal places)…
That calculation is clearly described in the book, check the LOS again. It is exactly like cpk said.
You guys are awesome. I missed that. Thank you!!!
Note, however, that there is no reason that the down factor has to be the reciprocal of the up factor.
Hi Bill - do you mean if the question provides both up and down, that we do not necessary take the reciprocal of the up to get the down?
Yup.
I wrote an article on using binomial trees to value options: http://financialexamhelp123.com/binomial-pricing-trees-for-options/