Consider an n = 2 step binomial tree with T = .5. Suppose r, the annualized risk-free rate is 8 %, and delta, the annualized dividend rate is 7 %. Also suppose the annualized standard deviation of the continuously compounded stock return, sigma, is 45 %.
a) Determine the gain factor u
?
b) Determine the loss factor d
?
c) Determine the risk-neutral probability p
?
You can earn partial credit on this problem.