Question: 5. Assume that the probability that the Patriots will win the Superbowl is 55%. A souvenir shop outside the stadium will earn net profits of

5. Assume that the probability that the Patriots will win the

5. Assume that the probability that the Patriots will win the Superbowl is 55%. A souvenir shop outside the stadium will earn net profits of $1.5 million if the Patriots win and $1.0 million it they lose. You are the loan officer of the bank to whom the shop applied for a loan. You can assume that your bank is risk neutral and that the bank can invest in safe projects that offer an expected rate of return of 10%. [Hint: this question requires that you compute the amount that you would demand for repayment.] (a) What interest rate would you quote if the owner asked you for a loan for $900,000 today? (b) What interest rate would you quote if the owner asked you for a loan for $1,000,000 today

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