A futures price is currently 40 cents. It is expected to move up to 44 cents or down to 34 cents in the next six months. The risk-free interest rate is 6%. What is the probability of an up movement in a risk-neutral world?
A. 0.4
B. 0.5
C. 0.72
D. 0.6
D
The probability of an up movement is (1-d)/(u-d). In this case u is 1.1 and d is 0.85 . The probability of an up movement is therefore 0.15/0.25=0.6 .
Business
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