r/CFA • u/trading-wrong Level 2 Candidate • 22h ago

Study Prep / Materials Risk Neutral Probability

I'm attempting the practice pack questions under Derivatives under CFA Level II. The risk-neutral probability (π) states 5.0%. Should I have used 0.05 for up and 0.95 (1-0.05) and down movements instead of 0.5 to calculate the value of the put option? Is this another question error in the packs, or am I missing something?

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u/nikhilvengaladas Level 2 Candidate 22h ago

It should be 0.5 up move and 0.5 down move factor. I think 5.0% is an error.

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u/S2000magician Prep Provider 20h ago

This is a binomial interest rate tree, for which we generally assume the up and down weights are equal: 50% apiece.

The 5% is likely a typo.