WHat happens when you are given the up and down moves but the D does not equal 1/U…should we just use the info given as accurate? bc i did come across a question where they gave u Up Down prob of up and prob of down and some of the info was incorrect and we were supposed to calculate it. I guess we have to see if the problem specifically says use the information given?
Prob of Down = 1 - Up
Up = 1 + Rf - Size Down / Size up - Size down
Added some parentheses for you (internal on the numerator isn’t really necessary, but it helps make things more clear in my opinion)…
Use given info as accurate.
It doesn’t matter. There’s no reason that D has to equal 1/U. The formula works no matter what D and U are.
U has to be 1/D. That is a requirement for a binomial tree.
There is another topic about this few weeks ago.
Schweser says : U=1 / D but this written nowhere in the curriculum.
I advice you to forget this formula and go with the curriculum :
U = S+ / S
D = S- / S
As s2000 said, there is no relation (arbitrage, nature, etc) for U to be equal to 1 / D
If the question says up move 15%, down move 10%, then :
U = 1,15
D = 0,9
No, it isn’t.