MATLAB: For those who love a challenge.

doit4mehomeworkrandrandom

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

Best Answer

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 $');