Let S = $100, = 0.30, r = 0.08, t = 1, and = 0.

Let S = $100, σ = 0.30, r = 0.08, t = 1, and δ = 0. Using equation (11.12) to compute the probability of reaching a terminal node and Suidnˆ’i to compute the price at that node, plot the risk-neutral distribution of year-1 stock prices as in Figures 11.7 and 11.8 for n = 3 and n = 10.

Transcribed Image Text:

Lognormal Probability Binomial Probabilit 0.014 0.012 0.010 0.008 0.006 0.004 0.002 0 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0 50 100 150 200 250 300 350 400 Lognormal ■ Binomial