Schweser notes book 2, page 245: in the binomial tree, stock price has only 2 possibilities, move up by 1% or move down by 1%, I can understand that the up-move factor is 1.01, which is 1+1%. But then I would expect that the down-move factor should be 1-1%=0.99 However, the notes say the down-move factor is 1/1.01. Why is that? I know the beauty of 1/1.01 is that if the stock price move up and move down using this down-move factor, it’ll go back to the original stock price. However, I’m stubbonly convinced by myself that the down-move factor should be 0.99. Please help.
Nah. But CFAI doesn’t tell you what the factors ought to be. It’s a topic beyond the scope.