I am working on Rubinsteins IBT and use the following paper to implement this into excel:
the original paper can be found here:
I am stuck in the last step: I calculated the path probabilities, denoted by "Q". In the paper "Implied Binomial Trees in Excel without VBA" page 7 and 17.
So I have now the results of Panel B on page 17. These are the Q at the last node, now I calculate the Q at the nodes before with $Q=Q^+ + Q^-$. So I have the resulting path probabilities Q shown in the uploaded and attached picture (the numbers are a bit different from the paper, because my excel solver was not that accurate, but the numbers should be the same).
So now I want to calculate the "R". These are the cumulative returns. In the paper it says on page 7: $R=(qR^+ + (1-q)R^-)/r$.
I know that the small qs are the up probabilities, calculated by $q=Q^+/Q$. Ok, the small r is a discounting factor, ok. But what are the $R^+$ and $R^-$. Where do I get them? Are these just the original prices form the CRR binomial tree?
Thanks a lot!
(in the excel file which can be downloaded, this step is not implemented)
It should be in the paper, though, for example "a 20% growth in the underlying gives R = 1.20"
My underlying, values u and d calculated by CRR? So the values of the underlying are:
@ Freddy Could you please use my example and do an example calculation? The comment is to general and not specific enough....