One year ago, Bioette, a biotech incubator, entered into a forward contract to sell one of its
Question:
One year ago, Bioette, a biotech incubator, entered into a forward contract to sell one of its patents to Pharm, a major drug company, in 2 years for \(\$ 10\) million.
Currently, with only 1 year remaining in the contract, both parties are concerned about the uncertainty of the patent's market value. A major insurer, Protech, is offering loss insurance to both parties. For a premium of \(\$ .4\) million now, it will pay Bioette the difference between the market value of the patent and the fixed sales price of \(\$ 10\) million if the market price is larger. Otherwise, it will pay nothing.
In a similar way, for a premium of \(\$ 1\) million, Protech will pay Pharm the difference between the \(\$ 10\) million and the market price if the market price is less than \(\$ 10\) million. Otherwise, it will pay nothing.
Considering that the price of a zero-coupon bond with a face value of \(\$ 100\) and 1 year to maturity is \(\$ 90\), what is the value that Protech would assign to the patent? (You may assume the insurance is tradable.)
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