# Risk Neutral valuation

• June 22nd 2009, 02:50 PM
Lawstudent
Risk Neutral valuation
Hi everyone,

Can someone help me solve this equation?

0.07 = (ProbabilityRise)(.25) + (1 – ProbabilityRise)(–.20)
• June 22nd 2009, 04:17 PM
Shyam
Quote:

Originally Posted by Lawstudent
Hi everyone,

Can someone help me solve this equation?

0.07 = (ProbabilityRise)(.25) + (1 – ProbabilityRise)(–.20)

$0.07=P(0.25)+(1-P)(-0.20)$

$0.07=0.25P-0.20+0.20P$

$0.07+0.20=0.25P+0.20P$

$0.27=0.45P$

$P=\frac{0.27}{0.45}=0.6$

Probability Rise = 0.60
• June 22nd 2009, 05:48 PM
TKHunny
Quote:

Originally Posted by Lawstudent
Hi everyone,

Can someone help me solve this equation?

0.07 = (ProbabilityRise)(.25) + (1 – ProbabilityRise)(–.20)

This worries me, LawStudent. Why are you in this class without basic algebra skills? Are you SURE you're in the right class? It's not likely to get any easier.