Finance-.Assume you are faced with an opportunity made up of three equally likely outcomes

| January 30, 2017

Question
Question 26.Assume you are faced with an opportunity made up of three equally likely outcomes. If the first outcome occurs, you receive $30. If the second outcome occurs, you receive no money. If the third outcome occurs, you must pay out $3. Given that you can be characterized as risk neutral, how much would you pay to take this risk? Would you be willing to pay more or less for this opportunity? Explain.

Question 29.Explain how you could achieve the sameor similar results of short selling a stock without using equities. What set of investments would allow you to replicate the same typeof upside and downside exposure?

Question 32.In considering either a covered call or a protective put:
a) Why would you use one versus the other to protect against an existing equity holding? How do each behave in a bullish or bearish market(or stock movement)? What factors will affect the decision to choose one versus another?

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SIMILAR to 26 :Assume that you are faced with an opportunity made up of three equally likely outcomes. If the first outcome occurs, you receive $10. If the second outcome occurs, you receive no money. If the third outcome occurs, you must pay out $1. Given that you can be characterized as risk neutral, how much would you pay to take this risk? Would you be willing to pay more or less for this opportunity? Explain

Answer: Given that the intrinsic value of this opportunity is equal to $3, over time, the likelihood of outperforming this $3 payout is unlikely. Being risk-neutral, I would not pay more than $3, but would happily pay less than $3.

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