Question: Contingent Claim Analysis Basic (optional) You just bought a share of WideCo for $48. You realize that this asset will either have a value of

  1. Contingent Claim Analysis Basic (optional)
  1. You just bought a share of WideCo for $48. You realize that this asset will either have a value of $70 or $20 in the future. You will either make $22 or lose $28 on this investment. What additional amount would you have to pay to insure against a loss on this investment? The insurance pays off in just the recession state.

  1. You may not have realized that the insurance based on the contingent claim analysis is actually a portfolio of the two stocks. What quantity of each stock are you buying or selling when you buy the insurance? You can figure out the shares of by setting up a system of simultaneous equations.

  1. Similarly, the risk-free asset is a portfolio. What quantity of the two stocks will replicate the risk-free asset?

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