MediumFinanceAcceptance 81%

Risk-Neutral Probability

Goldman SachsJ.P. Morgan

A stock at 100 will move to 120 or 80 in one period. With interest rate r = 0, what is the risk-neutral probability of an up move?

Approach

Make the expected stock price equal today’s price (r = 0).

q = (S − down)/(up − down).

Answer

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