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This lesson is a part of the course Common Probability Distributions
The future price movement of a stock can be approximated using a binomial tree.
Let’s say the current stock price is S. The price of the stock can either move up or move down. We will refer to the up movement as u and the down movement as d. A down movement d will then be given by d where d is assumed to be equal to 1/u. We also need the probability of an up move (p) and the probability of a down move (1 - p).
