At t=1, Mr A, Mr B and Mr C will compete with each other to be elected as the nation's president. One of them will be the winner Hedge Fund 1 is sponsoring Mr A. For Hedge Fund 1: the initial investment at t-0 s-$8M; cash flow at t=1 will be $20M if Mr A wins and $10M otherwise. The market rationally estimates that the NPV of this sponsorship for Hedge Fund 1 is $5M. Hedge Fund 2 is sponsoring Mr B For Hedge Fund 2: the initial investment at t-0 is-$7M; cash flow at t-1 will be $20M if Mr B wins, $0 if Mr A wins, and $10M if Mr C wins. The market rationally estimates that NPV of this sponsorship for Hedge Fund 2 is $1M. Hedge Fund 3 is sponsoring Mr C. For Hedge Fund 3: the initial investment at t=0 is-S4M: cash flow at t=1 will be $25M if Mr C wins, S0 M if Mr A wins, and $0 if Mr B wins. NPV of this sponsoring for Hedge Fund 3 is $1M. A gambling firm is designing "Mr A stock": For one share of "Mr A stock", it pays the owner $1 dollar at t=1 if Mr A becomes the president, and $0 otherwise Similarly, for one share of "Mr B stock", it pays the owner $1 dollar at t=1 if Mr B becomes the president, and $0 otherwise. For one share of Mr C stock", it pays the owner $1 dollar at t=1 if Mr C becomes the president, and $0 otherwise Suppose the market shares the same belief of the probability for each candidate to win the election. Calculate the fair-market value of one share of "Mr A stock" , Mr B stock", and "Mr C stock" at t-0 3.1 (5 marks) 3.2 Calculate the risk-free rate of this market. (5 marks) 3.3 Att-0, which candidate (Mr A, B or C) has the highest probability to be the winner? (5 marks) 3.4 Suppose that there is a following investment project: the initial investment at t-0 is - $6M; cash flow at t-1 will be $12M if Mr A wins and $8M otherwise. What is the NPV of this project? At t=1, Mr A, Mr B and Mr C will compete with each other to be elected as the nation's president. One of them will be the winner Hedge Fund 1 is sponsoring Mr A. For Hedge Fund 1: the initial investment at t-0 s-$8M; cash flow at t=1 will be $20M if Mr A wins and $10M otherwise. The market rationally estimates that the NPV of this sponsorship for Hedge Fund 1 is $5M. Hedge Fund 2 is sponsoring Mr B For Hedge Fund 2: the initial investment at t-0 is-$7M; cash flow at t-1 will be $20M if Mr B wins, $0 if Mr A wins, and $10M if Mr C wins. The market rationally estimates that NPV of this sponsorship for Hedge Fund 2 is $1M. Hedge Fund 3 is sponsoring Mr C. For Hedge Fund 3: the initial investment at t=0 is-S4M: cash flow at t=1 will be $25M if Mr C wins, S0 M if Mr A wins, and $0 if Mr B wins. NPV of this sponsoring for Hedge Fund 3 is $1M. A gambling firm is designing "Mr A stock": For one share of "Mr A stock", it pays the owner $1 dollar at t=1 if Mr A becomes the president, and $0 otherwise Similarly, for one share of "Mr B stock", it pays the owner $1 dollar at t=1 if Mr B becomes the president, and $0 otherwise. For one share of Mr C stock", it pays the owner $1 dollar at t=1 if Mr C becomes the president, and $0 otherwise Suppose the market shares the same belief of the probability for each candidate to win the election. Calculate the fair-market value of one share of "Mr A stock" , Mr B stock", and "Mr C stock" at t-0 3.1 (5 marks) 3.2 Calculate the risk-free rate of this market. (5 marks) 3.3 Att-0, which candidate (Mr A, B or C) has the highest probability to be the winner? (5 marks) 3.4 Suppose that there is a following investment project: the initial investment at t-0 is - $6M; cash flow at t-1 will be $12M if Mr A wins and $8M otherwise. What is the NPV of this project
