Bionomial move down

CFA Level II
#1

I saw two different version of mock answer for calculating stock bionomial move down.

If stock P=30, move down by 20%. One version calculated as 30*0.8, but another as 30/1.2.

Which one should we use?

#2

the probability of an up movement = (1+r-amt of down)/(amt of up - amt of down)

amt of up if 15% increase = 1.15, which implies a down movement of 1/1.15

probability of down movement = 1 - probability of up movement

#3

But sometimes it gives you both, say up move is 15%, but down move is 20%.

My question is how to calculate the down move… cuz the answer show two different versions.

#4

If they give both the amount of up and down movement, I generally use those numbers to calculate the probability of an up movement: so, (1 + r - .8 )/ .35

then 1- the answer from above is down movement prob

#5

Sorry… maybe we are not talking about the same thing… Hope anyone can help…

#6

If they give you the size of the down move, you need to use the figure they give you. If they do not, then calculate it yourself.

#7

That does make sense. But if they give you down move 20%. Do you use P/1.2 or P*0.8? Please clarify. ty

#8

if they give u the up move and the down move, great no question asked right ?

if they give u the up move only then the down move is 1-1/UP but remember if UP is 15% then down is -11/1.15 i.e. it is the factor that u use to calculate the move size not the %

#9

if they give u the up move and the down move, great no question asked right ?

if they give u the up move only then the down move is 1-1/UP but remember if UP is 15% then down is -11/1.15 i.e. it is the factor that u use to calculate the move size not the %

#10

Okey. So now they give you P=30, down move is 20%, what’s the first period down move price then?

#11

1-0.2 = 0.8 so P(d) = P x 0.8

#12

if they give you D use that, if not then use 1/u