Investment in Energy Assets Under Uncertainty by L.M. Abadie & J.M. Chamorro

Author:L.M. Abadie & J.M. Chamorro
Language: eng
Format: epub
Publisher: Springer London, London

(4.22)

Thus, the parameters to be used in a (one-dimensional) binomial lattice must comply with the following:1.for the mean:

(4.23)

2.for the variance:

(4.24)

Hence the following can be deduced:

(4.25)

Parameters p, u, and d are independent of F. The probabilities are therefore constant throughout the tree. Since and is always satisfied. Similarly, . Therefore, in this type of implementation the risk-neutral probabilities will always be positive.

The exact solution for the value of u can be found by solving the system of the last two equations. This can be proven to be:

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