Consider the binomial tree model

Reference no: EM13337895

Consider the binomial tree model. Write S(8) in terms of m,σ, τ , and (i), i = 1,...,8.

Notation clarification: Consider a sequence of binomial tree modelswith time step τ = 1/N letting

N∞. We denote by m the expectationand by σ the standard deviation of the logarithmic return k(1)+ k(2)+...k(N) over the unit time interval from 0 to 1, consistingof N steps of length τ

Introducing a sequence of independent random variables (n), each with two values:

(n) = + √τ withprobabaility 1/2, and - √τ (square root) withprobability 1/2

We can write the logarithmic return as k(n) = mτ +σ(n).

Reference no: EM13337895

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