Model Description:
The stock price process
on each node on the tree
is assumed to follow the
following process:
u = e^q*sqrt*dt for up
movement. Q is the stock
volatility, and dt is
the time change. The down movement of
the tree is assumed to
= 1/u Assuming annual stock
price move from each node,
we are pricing the stock
from t=0 and moving forward
through the tree till
t=5. At node 4 (t=4), the
stock price is equal to:
St*u^4 for the top node,
St*u^3*d, etc. And the probability
for the up and down movements
are assumed to be:
P = (e^r*td - d)/(u -
d) for up movement and
(1-p) for down movement. |