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Binomial tree option pricing reference to p42 Baxter and Rennie
The eqtn q =(s *exp(rdt)- sdown)/(sup-sdown)am i missing something obvious but I cant derive the result stated belowq = 1/2( 1-sqrt(dt)*((mu +1/2sig^2 -r)/sig) )where sup = s exp(mu *dt +sig*sqrt(dt) ) sdown = " - "I have Taylor expanded the fraction but this does not appeasr to workthankstom
Binomial tree option pricing reference to p42 Baxter and Rennie
Hello,the result does follow if you use a Taylor expansion to second orderexp x = 1 + x + 1/2 x^2 + O(x^3).Simplify, replace and leave out the term in (dt)^(3/2) to get the given result.