A Brief DPL Tutorial

Modeling a Lognormal Distribution with a binomial lattice
Rather than inputting all the expected future prices of an asset, we can assume that prices
will follow a certain distribution, and have the model compute what these values will be.
Let’s assume that a NBI Inc’s current stock price is $100, the volatility is 30% per year,
and that stock prices follow a lognormal distribution. We can model these prices with a
t
binomial lattice, where the up state has a value of u e σ
= and d = 1/u. The probability is
rt
e − d
given by p = . We will create a 5 year model (t=1), where r = 5%.
u−d Open a new DPL file. In the Influence Diagram Pane:
♦ Click on the Value Node icon to create a Value Node. We will use these for our
constants.
♦ Name this “u”
♦ Click on the Data tab
♦ Input the formula for u = exp (0.30)
♦ Click Enter and OK
♦ Click on the Value Node icon to create a Value Node.
♦ Name this “d”
♦ Click on the Data tab
♦ Input the formula for d = 1/u
♦ Click Enter and OK
♦ Click on the Value Node icon to create a Value Node.
♦ Name this “r”
♦ Click on the Data
tab
♦ Input the value for r. (0.05)
♦ Click Enter and OK
♦ Click on the Value Node icon to create a Value Node.
♦ Name this “t”
♦ Click on the Data
tab
)
♦ Input the value for t. (1
♦ Click Enter and OK
♦ Click on the Value Node icon to create a Value Node.
♦ Name this “p”
♦ Click on the Data
tab
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