Hi, Has anyone attempted the April 2003 109 paper? For Question 8iv), why must we divide by exp(-qt)? And when do we take d=1/u like this example in part i).
I dont agree with the division by exp(-qt). Given that q is the risk neutral measure, not a dividend yield (not that it would make sense if it was a dividend yield). For part 1 they say it's a recombining tree and define u. I suppose the 'safest' thing to do is assume d = 1/u although it needn't be. Although the examiners seem to be using the formula on page 45 of the tables to the 1/u approach is kind of implied.
