Suppose that you own an asset with the following characteristics: after two years the asset will pay you either $10,000,000 or $2,000,000. Each outcome is equally likely (probability is 50% for each possible outcome) and the payoff is guaranteed (e.g., the payoff, whichever one occurs, is backed by the government).

you can use the rate 5% annually. A. Assume you will hold the asset for two years and sell the asset just before the payoff is revealed. (Holding the asset does not change the probabilities of the outcomes so there is no additional risk generated from holding the asset.) What is the minimum amount that you would accept in exchange for the asset just before the payoff is revealed? Explain why.

B. Assume instead that you decide to sell the asset when it still has two years to 'maturity'. What is the minimum acceptable selling price to you at that time? Explain why.

By way of clarification, question A asks what would *you* sell the gamble for just prior to the 'coin flip'. In other words, what minimum certain dollar amount would you accept to avoid the 'coin flip' that reveals the outcome. You are effectively selling the gamble to someone else just before the 'coin flip'. By the way, there is not some calculation involved because you dont have a specified utility function. However, you should know your preferences and thus the minimum certain dollar amount you would accept in exchange for the gamble. It is not an easy decision. Likewise, when answering question B, just be thoughtful and honest: What is the least that *you* would sell the asset for at t=0?