Question
there is a market for bets on the outcome of a coin toss. the possible outcomes are heads, tails, and edge. there are three assets
there is a market for bets on the outcome of a coin toss. the possible outcomes are heads, tails, and edge. there are three assets traded in that market:
Asset A pays $1 independent of the outcome
Asset B pays $1.50 for a head and $0 for tails and $1 if the coin lands on its edge
Asset C pays $10 if and only if the coin lands on its edge and $0 otherwise.
The prices of those assets are always constant and are fixed at $1. We assume that the payments to the wining bidders take place immediately after the outcome is determined.
(a) What is the implied risk-free interest rate in this market?
(b) What are the risk-neutral probabilities of each of the possible coin toss outcomes (heads, tails, edge)?
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