# Question: Consider Joe and Sarah s bet in Examples 21 2 and 21 3 a

Consider Joe and Sarah’s bet in Examples 21.2 and 21.3.

a. In this bet, note that $106.184 is the forward price. A bet paying $1 if the share price is above the forward price is worth less than a bet paying $1 if the share price is below the forward price. Why?

b. Suppose the bet were to be denominated in cash. If we want the bet to pay x if S >x, what would x have to be in order to make the bet fair?

c. Now suppose that we pay one share ifS >x. What would x have to be in this case to make the bet fair?

a. In this bet, note that $106.184 is the forward price. A bet paying $1 if the share price is above the forward price is worth less than a bet paying $1 if the share price is below the forward price. Why?

b. Suppose the bet were to be denominated in cash. If we want the bet to pay x if S >x, what would x have to be in order to make the bet fair?

c. Now suppose that we pay one share ifS >x. What would x have to be in this case to make the bet fair?

## Answer to relevant Questions

Consider again the bet in Example 21.3. Suppose the bet is S − $106.184 if the price is above $106.184, and $106.184 − S if the price is below $106.184. What is the value of this bet to each party? Why? The box on page 282 discusses the following result: If the strike price of a European put is set to equal the forward price for the stock, the put premium increases with maturity. a. How is this result related to Warren ...In this problem we will use Monte Carlo to simulate the behavior of the martingale St/Pt , with Pt as numeraire. Let x0 = S0/P0(0, T ). Simulate the process xt+h= (1+ σ√ hZt+h)xt Let h be approximately 1 day. a. Evaluate ...For the lookback call: a. What is the value of a lookback call as ST approaches zero? Verify that the formula gives you the same answer. b. Verify that at maturity the value of the call is ST − ST . Verify in Example 23.12 that you obtain the same answer if you use x0Q0 as the stock price, δQ+ ρsσQ + r − rf as the dividend yield, r as the interest rate, and σQ as the volatility.Post your question