Suppose the underlying asset is paying a continuous dividend yield at the rate q, the two governing

Question:

Suppose the underlying asset is paying a continuous dividend yield at the rate q, the two governing equations for u,d and p are modified as 

pu + (1 - p)d = e(r-q)4t pu + (1 - p)d = (r-q)Ato At

Show that the parameter values in the binomial model are modified by replacing the growth factor of the asset price erΔt (under the risk neutral measure) by the new factor e(r−q)Δt while the discount factor in the binomial formula remains to be e−rΔt .

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question
Question Posted: