Question
The University of Iowa's operates one such exchange, called IEM,. For example, it started trading the following contracts based on the outcome of the 2016
The University of Iowa's operates one such exchange, called IEM,. For example, it started trading the following contracts based on the outcome of the 2016 US presidential election in Nov 2014:
DEM16_WTA$1 if the Democratic Party nominee receives the majority of popular votes cast for the two major parties in the 2016 U.S. Presidential election, $0 otherwise
REP16_WTA$1 if the Republican Party nominee receives the majority of popular votes cast for the two major parties in the 2016 U.S. Presidential election, $0 otherwise
Assume there are only 2 parties and that the winner of the popular vote gets elected president :
Question 1-
On 31st July 2015 (will call today) , you observe that the market price of DEM16_WTA is 58 cents. Also you can invest $1 today, in risk free bonds to give $1.05 by the time of election results are determined, what should be price of REP16_WTA on 31st July 2015.
Question 2-
The Republican candidates is friendlier to business and believes in lowering tax rates. There is a firm which the market believes would be worth $200mn if the Republican candidates wins and $120mn if the Democratic candidates wins. What should be firm's price today.
Question - 3
Suppose you are considering buying a contract, which gives you the right, but not the obligation to buy the firm for $150mn. What would such a contract be worth today.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started