Let”s suppose that the risk adjustment of investors is 0.05% and the risk-free rate is 4%. Determine the time 1 value of the following contingent claim in the different cases:
|
State |
Probability |
Contingent Claim |
|
1 |
1/6 |
10 |
|
2 |
½ |
4 |
|
3 |
1/3 |
1 |
- Homogenous expectations and risk-neutral investor
- Homogenous expectations and risk-averse investor
- Now suppose a market with two identical claims and three investors and let”s assume that an investor can hold at most one claim. Let”s also suppose that the investors have the following view of the contingent claim:
|
State |
Probability investor 1 |
Probability investor 2 |
Probability investor 3 |
|
1 |
1/6 |
1/3 |
¼ |
|
2 |
½ |
1/6 |
½ |
|
3 |
1/3 |
1/2 |
1/4 |
What will be the price of the contingent claim in this market?