18.4 1. Tree Parameters for a Nondividend paving stock o We choose the tree parameters p, u, and d so that the tree gives correct values for the mean standard deviation of the stock price changes in a risk-neutral world erot= pu+(1-pd 2t=p2+(1-p)d2-[pu+(1-p)d]2 a further condition often imposed isu=1/d Options, Futures, and Other Derivatives, 5th edition C 2002 by John C Hull18.4 Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 1. Tree Parameters for a Nondividend Paying Stock • We choose the tree parameters p, u, and d so that the tree gives correct values for the mean & standard deviation of the stock price changes in a risk-neutral world e r dt = pu + (1– p )d s 2dt = pu 2 + (1– p )d 2 – [pu + (1– p )d ] 2 • A further condition often imposed is u = 1/ d