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Dear David,

Binomial pricing model is quite commonplace in the syllabus for non-dividend paying stocks. However if we were to have dividend paying stock we will use

P(u) (Probability of up movt) = (exp^(r-q)*t - D)/(U-D)

This is pretty clear, however when we calculate payoffs(multiplied by probability) and discount them to today do we use disounting factor of exp^(-r)*t or exp^(-(r-q)*t)

I haven't found any question asking to calculate price for dividend paying stock using binomial method. Do you think there is a possibility of it springing up in the exam?

KR

Uzi

Binomial pricing model is quite commonplace in the syllabus for non-dividend paying stocks. However if we were to have dividend paying stock we will use

P(u) (Probability of up movt) = (exp^(r-q)*t - D)/(U-D)

This is pretty clear, however when we calculate payoffs(multiplied by probability) and discount them to today do we use disounting factor of exp^(-r)*t or exp^(-(r-q)*t)

I haven't found any question asking to calculate price for dividend paying stock using binomial method. Do you think there is a possibility of it springing up in the exam?

KR

Uzi

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