AdvancedMultiple choice
Replicating a binary claim · Part 3 of 3
A stock at $50 will be worth either $60 or $40 in one period. $1 invested riskless grows to $1.02 over the period. A claim pays $10 if the stock goes up and nothing if it goes down.
A client is sure the stock will go up with probability 0.9 and offers to buy the claim from you. What is the least you should accept?
- A$5.39, the same as before
- B$8.82, the client’s expected payoff of 9 discounted at the riskless rate
- C$9.00, the expected payoff at the client’s probability
- D$4.90, using an even 50–50 chance of each state
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