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

Question

Quizplus · Accepted Answer

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.

A Futures Price Is Currently 40 Cents