practice questions hull

[noalv4]

Hi David,
Regardind the first question of Hull's chapter 11, question no. 11.01:
according to the study notes, p formula is a function of: EXP(-r*t)-d/u-d=p. so:
u is: 42/40=1.05
d is: 38/40=0.95
p=EXP(-0.08*1/12)-0.95/1.05-.95=0.433
1-p=0.5669
according to that, the value of a call option should be: 1.29.

your answer puts 1-p as p, so the value of call option is 1.69.

What did I miss here?

Thanks,
Noa.

 

[David Harper CFA FRM]

Hi Noa,

p = [exp(rT) - d]/(u-d) not [exp(-rT) - d]/(u-d), so you should get p=EXP(+0.08*1/12)-0.95/1.05-.95=0.56689.

please advise if our notes incorrectly specify (p), I don't see it; e.g. p 46 and p 51 appear correct ... thanks!