Expected rate of return (risk-free interest rate) = rising probability × share price rising percentage+falling probability × (-share price falling percentage)

Option value

= expected value of maturity ÷( 1+ risk-free interest rate of holding period)

= (uplink probability ×Cu+ downlink probability ×Cd)/( 1+r)

The basic idea of risk neutrality principle

Assuming that investors' attitude towards risk is neutral, the expected return rate of all securities should be risk-free interest rate.

The probability formula is: p (a ∪ b) = p (a)+p (b)-p (ab).

Theorem: Let A and B be mutually incompatible events (AB=φ), then: P(A∪B)=P(A)+P(B)-P(AB).

Inference 1: Let A 1, A2,? , An are incompatible with each other, then: p (a1+a2+...+an) = p (a1)+p (a2)+? + P(An).

Inference 2: Let A 1, A2,? , An constitutes a complete event group, then: p (a1+a2+...+an) =1.

relevant information

Conditional probability: the probability of occurrence of A under the condition that event B is known, which is called conditional probability and recorded as: P(A|B).

Conditional probability calculation formula:

When P(A) >; 0，P(B|A)=P(AB)/P(A).

When P(B)>0, P(A|B)=P(AB)/P(B).

P(AB)=P(A)×P(B|A)=P(B)×P(A|B .

Promotion: P(ABC)=P(A)P(B|A)P(C|AB).