Down Transition Probability

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.

Investopedia explains '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 1-Qu, 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 1-Qu-Qd.



comments powered by Disqus
Hot Definitions
  1. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  3. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  4. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  5. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  6. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
Trading Center