For those who love a challenge.

Let St be the price of one share of a particular company at time t. If the price St+1 at time t+1 can either take the value of uSt with probability p1 (where u>1), remain the same with probability p2 or go down to dSt with probability 1-p1-p2 (where 0<d<1), create a Matlab function called ... that simulates {St} from t=0 to t=20 for given u,d,p1 and p2 and plots St against t. Hence, by counting the number of paths; calculate the probability that S6=S0(u^2)(d^3)

using the command RAND

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[Randy Souza]

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Answer 1

[Youssef Khmou]

hi Charlene , here is an initiation :

u=1.33; 
d=0.75;
p1=0.44;
p2=0.25;
p3=1-p1-p2;
t=0:1:20;
St=zeros(size(t));
St(1)=400; % S(t=0)=S0

 for n=1:length(t)-1

     r=rand(1); % ~(Uniform)

     if r>p3 && r<p2
         St(n+1)=d*St(n);
     elseif r>p2 && r<p1

         St(n+1)=St(n);
     elseif r>p1
         St(n+1)=u*St(n);
     end
 end

 figure, plot(t,St), xlabel('time (DISCRET)'), ylabel(' PRICE in $');

[José-Luis]

Please do not post complete answers to homework questions.