Question
NewHope Inc. is considering creating a new security. This security would pay out $130 in one year if the last digit in the closing value
NewHope Inc. is considering creating a new security. This security would pay out $130 in one year if the last digit in the closing value of the Dow Jones Industrial index in one year is an even number and zero if it is odd. The one-year risk-free interest rate is 6%. Assume that all investors are averse to risk and all CAPM assumptions hold true. a. What can you say about the price of this security if it were traded today? b. Say the security paid out $130 if the last digit of the Dow Jones is odd and zero otherwise. Would your answer to part (a) change? c. Assume both securities (the one that paid out on even digits and the one that paid out on odd digits) trade in the market today. Would that affect your answers?
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