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