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?
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