DEFINITION of 'Down Transition Probability'
The probability that an asset's value will decline in one period's time within the context of an option pricing model. The option pricing models using a down transition probability are both the binomial and trinomial option pricing models.
BREAKING DOWN 'Down Transition Probability'
In a binomial option pricing model, the probability that an option's underlying asset declines in value over a time step may be denoted by 1Qu, where Qu represents the probability that the option's underlying asset will increase over the next time step in decimal form.
Under the trinomial model, the probability of a down transition is equal to the probability of an upward transition or an equal transition over the next time step not happening. If we denote Qu as the probability of the underlying asset increasing in value over the next time step, Qd as the probability the value of the underlying asset will decrease over the next time step, then the probability that the underlying asset's value stays the same is 1QuQd.

Derivative
A security with a price that is dependent upon or derived from ... 
Trinomial Option Pricing Model
An option pricing model incorporating three possible values that ... 
Option
A financial derivative that represents a contract sold by one ... 
Embedded Option
A provision in a security that is an inseparable part of the ... 
Binomial Option Pricing Model
An options valuation method developed by Cox, et al, in 1979. ... 
Intrinsic Value
Intrinsic value is the actual value of a company or an asset ...

Options & Futures
Reducing Risk With Options
If you want to use leverage to your advantage, you must know how many contracts to buy. 
Fundamental Analysis
Find The Right Fit With Probability Distributions
Discover a few of the most popular probability distributions and how to calculate them. 
Options & Futures
Options Trading With The Iron Condor
This options strategy allows your profits to soar in a sideways market. 
Options & Futures
Using Options Instead Of Equity
Learn how to multiply returns and diversify risk by buying options instead of stock. 
Mutual Funds & ETFs
Top 3 Muni California Mutual Funds
Discover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability. 
Investing Basics
What Does Plain Vanilla Mean?
Plain vanilla is a term used in investing to describe the most basic types of financial instruments. 
Investing Basics
What Does In Specie Mean?
In specie describes the distribution of an asset in its physical form instead of cash. 
Economics
Calculating Cross Elasticity of Demand
Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another. 
Fundamental Analysis
Emerging Markets: Analyzing Colombia's GDP
With a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy. 
Options & Futures
Pick 401(k) Assets Like A Pro
Professionals choose the options available to you in your plan, making your decisions easier.

Can mutual funds invest in options and futures?
Mutual funds invest in not only stocks and fixedincome securities but also options and futures. There exists a separate ... Read Full Answer >> 
Is Colombia an emerging market economy?
Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >> 
What assumptions are made when conducting a ttest?
The common assumptions made when doing a ttest include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >> 
What is the utility function and how is it calculated?
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >> 
How does a forward contract differ from a call option?
Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >> 
What are some of the more common types of regressions investors can use?
The most common types of regression an investor can use are linear regressions and multiple linear regressions. Regressions ... Read Full Answer >>