Suppose your Foundations of Finance TA Quirin offered the following deal in order to incentivize the performance of his class on the final exam: For every point you can raise your average in this class above 90, you will be given $1.

Your other TA Noah is offering a "hedge" on your grade, such that for every point the final exam makes your grade below 90, you will get $1, but he is asking for an up-front payment of $100.

Assume you currently have an 80 in this class.

Based on the price of Noah's offer and the principles of no-arbitrage, how much would you be willing to pay for Quirin's offer?

Assume the test is in one week, the weekly interest rate is 1%, and there is no upper limit to what your average can be after the final (i.e. can go above 100%).

Answer rating: 100% (QA)

Answer Spot price 80 Strike price 90 Interest rate 1 Noahs offer is eq... View the full answer