I. Module 4 Quiz 2: Risk-Neutral Probabilities

  • Due No due date
  • Points 10.5
  • Questions 8
  • Time Limit None
  • Allowed Attempts 3

Instructions

Let's continue to explore the binomial example. A stock has price 1, and pays LaTeX: u or LaTeX: d. The interest rate is LaTeX: R^{f}. The states have probability LaTeX: \pi(u) and LaTeX: \pi(d). Find 

a) the contingent claim prices
b) the stochastic discount factor 
c) the risk neutral probabilities. 

Write out formulas for each quantity, i.e. in terms of LaTeX: u,d,R^f,\pi (u),\pi (d). Calculate values based on LaTeX: u=1.5,d=0.9,R^{f}=1.1,\pi (u)=2/3,\pi (d)=1/3.

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