Sunny (S) pays $1 at the end of the month if there are at least 12 days of sunshine and $0 otherwise. The price of the contract is $0.30.
Cloudy (C) pays $1 at the end of the month if there are less than 12 days of sunshine and $0 otherwise.
The risk free rate is 4.167%. What is the price for the Cloudy (C) contract today, if the Law of One Price holds? a. $0.68 b. $0.66 c. $0.60
Suppose the probability of 12 sunny days is 40%, what is the expected return for the Sunny (S) contract? a. 0.000% b. 0.333% c. 0.667%
Suppose the All - Day (AD) contract pays $1, regardless of the days of sunshine. Under no arbitrage, what should be its price today? a. $0.98 b. $0.96 c. $0.90
Suppose the All - Day (AD) contract has a price of $0.98, what investment strategy would we expect under an efficient market?
a. Borrow at the risk - free rate of 4.167% to buy the All - Day (AD) contract?
b. There is no strategy because prices are set efficiently.
c. None of the above.