Consider Joe and Sarahs bet in Examples 21.2 and 21.3. a. In this bet, note that $106.184

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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 if S > x. What would x have to be in this case to make the bet fair?

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Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

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Question Posted: Aug 12, 2015 02:53 AM

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Consider Joe and Sarahs bet in Examples 21.2 and 21.3. a. In this bet, note that $106.184

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These bets are all or nothing options The cash bets being worth per dollar e rT N d 2 if we receive ...View the full answer

Derivatives Markets

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