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2 To show that lognormal price dynamics is the continuum limit of a family of binomial trees, we considered the following multiperiod multiplicative tree: the
2 To show that lognormal price dynamics is the continuum limit of a family of binomial trees, we considered the following multiperiod multiplicative tree: the stock price at the initial node is S(0); if at a given node the stock price is Snow, then at the next time it can be either at each time, the stock goes up or down with probability 1/2 for each choice. Fixing N, consider the stock price after N time steps, s(). (a) Suppose that over the course of the N time steps the stock goes upj times and down Nj times. Express Ins() in terms J (b) What is the mean of Ins(Nar)? (c) What is the variance of InS()? 2 To show that lognormal price dynamics is the continuum limit of a family of binomial trees, we considered the following multiperiod multiplicative tree: the stock price at the initial node is S(0); if at a given node the stock price is Snow, then at the next time it can be either at each time, the stock goes up or down with probability 1/2 for each choice. Fixing N, consider the stock price after N time steps, s(). (a) Suppose that over the course of the N time steps the stock goes upj times and down Nj times. Express Ins() in terms J (b) What is the mean of Ins(Nar)? (c) What is the variance of InS()
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