In the examiners' report, the given solution shows that q=(1.04^2-0.8)/(1.3-0.8). I thought the formula was q=(e^rt-d)/(u-d)? Why it's different?
Hi Jia It's because the exam question involves an effective interest rate, i, rather than a force of interest (= continuously compounded rate), r. Going back to CT1/CM1 days, the force of interest is defined as: r = ln(1 + i) So that: exp(r) = (1 + i) exp(rt) = (1 + i)^t Hence why we have exp(2r) = 1.04^2 in this question. Anna
