Question: Let S = $80, K = $75, r = 6% (continuously compounded), d = 5%, s = 40%, T = 1, and n = 2.

Let S = $80, K = $75, r = 6% (continuously compounded), d = 5%, s = 40%, T = 1, and n = 2. In this situation, the appropriate values of u and d are 1.33355 and 0.75742, respectively. What is the value of p*, the risk-neutral probability of an upward movement in the stock price at any node of the binomial tree?

ANSWER:

0.4298

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