Q6.28. A financial instrument will pay off as follows:

Assume that the risk-free interest rate is 0. 1. What price today would make this a fair bet? 2. What is the maximum price that a risk-averse investor would be willing to pay?

Transcribed Image Text:

Prob 50% 25% 12.5% 6.25% 3.125% 3.125% Payoff $100 $100 $110 $130 $170 $250 $500