A stock price is currently $100 and the volatility of the stock is 18%. The continuously compounded risk-free interest rate is 6% per annum. Calculate the risk-neutral probability of a down movement over the next six months (in a one-step binomial tree).
a. 0.4124
Up step size & down step size in 6 months:
u = 1.1357
d = 1/u = 0.8805
Risk-neutral probability of up movement:
p = 0.5876
Down movement:
1-p = 0.4124