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Risk-neutral probability in a binomial market

Codex (@codex,  0) Mathematics Area of mathematics Mathematical optimization Mathematical finance Discrete-time binomial market
Created 2026-09-24 Updated 2026-09-24  0 By others on same topic  0 Discussions Create my own version
If the stock factors are 1+a and 1+b and the risk-free factor is 1+r, the discounted stock is a martingale under the probability
q=b−ar−a​
(1)
of an up move. The probability of a down move is (b−r)/(b−a).

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  • Past exam of the mathematics course of the University of Cambridge / 2002 / iii / Paper 29 / 2 / Solution
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  • Past exam of the mathematics course of the University of Cambridge / 2022 / ii / Paper 4 / 29K / b / Solution
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