Can anyone explain to me the derivation of the formula for risk neutral probability of an up-move? (1+Rf-D) / U-D? I looked in Schweser and the original CFA book and it is very unclear to me. Thank you
I will try this: to entice an investor to buy a corporate bond it must earn at least the risk free rate then once the yield is set any further decline in IR increase the price of the bond then to come up with a “risk neutral type probability” we must earn at least the rf or the amount when rates decline… hope this helps a little?