Good day, colleagues!
I have one question about LOS 9g (Schweser): Construct a binomial tree to describe stock price movements:
“A binomial model can be applied to stock price movements. We just need to define the two possible outcomes and the probability that each outcome will occur. Consider a stock with current price S that will, over the next period, either increase in value by 1% or decrease in value by 1% (the only two possible outcomes). The probability of an up-move (the up transition probability, u) is p and the probability of a down-move (the down transition probability, d) is (1 - p). For our example, the up-move factor (U) is 1.01 and the down-move factor (D) is1 / 1.01. So there is a probability p that the stock price will move to S (1.01) over the next period and a probability (1 - p) that the stock price will move to S/1.01.”
I can`t understand, why the down-move factor (D) is 1 / 1.01, not 1 - 0,01=0,99?