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Assume again that I ask you to lend me money. You believe that I will pay you what I promise with 0.90 probability; that I
Assume again that I ask you to lend me money. You believe that I will pay you what I promise with 0.90 probability; that I will repay 50% of what I borrowed with 0.07 probability; and that I will repay nothing with 0.03 probability. I want to borrow $200 from you for one-year. You could alternatively invest into a government bond promising 5% interest rate at the end of one-year. Use the risk-neutral pricing approach as we discussed during the class. Then, what interest rate is required as a promise to ensure an expected interest rate of 5% ? (Refer to textbook problem Q6.9., and Submit your answer in decimals, not in percentages.)
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